Economic growth is now more dependent on internal consumption as opposed to demand for exports Yi Xiong,
Chief Economist, China, Deutsche Bank Research
services covering issuance, trade, post- trade processing, information, benchmark and training services for interbank foreign exchange (FX) market, money market, bond market and derivatives market), foreign holdings of Chinese bonds have grown at nearly 40% per year since 2017, reaching 3.25trn yuan (¥), or €417.8bn, at the end of 2020.
These market reforms have been instrumental in convincing a number of global benchmark providers, such as FTSE Russell and the Bloomberg Barclays Global Aggregate Index, to add Chinese debt to their indices. Despite these reforms, foreign investor participation in the onshore market continues to be somewhat restrained. Again, this is stifling Chinese efforts to internationalise the RMB. According to the International Capital Market Association (ICMA), China’s onshore bond market totals US$15trn, making it the second largest in the world after the US, but foreign investors hold just 3% of it (see Figure 1, below).
Tony Chao, Head of Securities Services, Greater China at Deutsche Bank, highlights several factors that explain why international investors were so underweight in Chinese bonds and equities relative to other developed markets. “China has historically been a restrictive market for foreign investors. Some global institutions have repeatedly expressed concern about repatriation risk and their ability to remit capital into and out of China,” comments Chao. “This often precludes Undertakings for the Collective Investment in Transferable Securities (UCITS) funds from investing in China, as UCITS rules state that managers cannot participate in markets where there are restrictions on capital flows.” In addition, the limited availability of FX hedging tools until 2020 was also off-putting for risk-sensitive investors.
To increase foreign participation in China’s bond market, the CFETS has worked on expanding the interbank market’s trading products and services to facilitate access. Meijing Li, General Manager of the RMB Market Department, sets out three key initiatives: “First, we are collaborating with third-party trading platforms such as Tradeweb and Bloomberg to enable foreign institutions to operate on a request for quote (RFQ) protocol from counterparties through their platforms or terminals via the over-the-counter CIBM Direct or Bond Connect channels. Second, we have introduced direct trading services under CIBM Direct, which allows foreign institutional investors to send quotation requests to domestic market-making institutions directly for spot transactions, and adopt the ‘international payment’ mode, which is more in line with foreign investors’ trading habits.”
“Third, we continue to facilitate trading by optimising pre-allocation, post-allocation and list trading functions, providing a full volume of indicative quotes on the bond market, lowering the minimum trading volume of RFQ to RMB10,000 (€1,285), and extending the trading hour to 20:00 Beijing time and settlement cycle to T+N. Lastly, the overseas issuance system (ePrime) provides one-stop electronic services for book entry and pricing and allocation of various types of overseas bonds, including Chinese corporate US dollar bonds and ‘dim sum’ bonds.”
As CIBM’s important central securities depository and securities settlement system, China Central Depository & Clearing Company (CCDC) provides a full set of bond services, including issuance, registration, depository and settlement for government bonds, local government bonds, policy bank bonds, enterprise bonds, and so on. It has deposited more than ¥77trn of bonds, accounting for about 74% of the total bond market. CIBM Direct is the main channel for foreign investors to participate in the CIBM. CCDC provides the CIBM Direct service for more than 1,200 foreign investors; these investors held ¥2.88trn of bonds by the end of 2020, accounting for 95% of the total amount of RMB bonds held by foreign investors. Among the bonds deposited by CCDC, the bonds held through CIBM Direct account for 76% of the market share (Bond Connect accounts for the remaining 24%).
Figure 1: Holdings of free-floating Chinese shares (%) 2010 2015
Wenbin Zhou, Vice General Manager of CCDC Shanghai Headquarters, explains that “In order to provide better service to foreign investors to participate in the CIBM, CCDC adheres to the international rules, such as the Principles for Financial Market Infrastructures, to build an efficient and transparent segregated account system to fully protect their rights and interests. On the other hand, CCDC cooperates with the custodian banks to provide mature and convenient multi-level services for the market. For example, CCDC launched remote electronic account-opening measures to overcome the impact of Covid-19 by building online communication platforms for global investors to improve market transparency.
2020 0 Retail 20 Institutional 40 Foreign 60 80 100 Source: Financial Times
“CCDC also brought out several settlement facility measures, including a non-standardised settlement cycle and recycling settlement. Repo trade for foreign investors through CIBM Direct is
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