Investor ingress into the world of Chinese bonds is about to get easier with the introduction of a settlement system that connects mainland China to Hong Kong, meeting a regulatory requirement that could pave the way for more investors.
In addition, meeting the requirement will allow Chinese bonds to be listed on a major global index. Much like its listed stocks, China is hoping to also add its bonds to the Bloomberg-Barclays Aggregate Index.
“We are looking at China in terms of the fixed-income market,” said Uwe Parpart, chief strategist at Capital Link International. “We believe China has de-levered very successfully over the past several months and will continue to do so. This is positive fixed-income, the credit cycle in China is point up so we have a good situation for bond investment in China.”
The access was made possible as a result of a program called Bond Connect, which allows international investors from Hong Kong and other parts to invest directly in bonds issued by China. The new settlement system is known as real-time delivery-versus-payment, which ensures that payment and delivery occur simultaneously–a major technological breakthrough for investor access to Chinese bonds.
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While some market experts feel that the inclusion of Chinese bonds into the Bloomberg-Barclays index will not have a significant impact on Chinese domestic bond yields, the settlement system is still nonetheless a major development.
“More broadly, as perhaps a symbolical first step towards inclusion in the global family of indices, it’s of critical importance,” said John Woods, chief Asia-Pacific investment officer for Credit Suisse. “We’re seeing Chinese risk, both fixed income and equity, becoming more of a tradeable asset, more of an investable risk asset as far as global investors are concerned.”
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For more trends in fixed income, visit the Fixed Income Channel.