Overseas investors buy up mainland Chinese bonds

In 2017, UBS became the first international asset manager to be present in the Qianhai Free Trade Zone to strengthen financial cooperation between Shenzhen and Hong Kong.

Evelyn Cheng | CNBC

BEIJING – Foreign investors and financial institutions are still interested in investing in China despite geopolitical tensions – and analysts say a lot more money could be coming into the country from overseas.

Differences in monetary policy and periods of recovery from the coronavirus pandemic have contributed to persistently higher yields on Chinese government bonds compared to those in the US and Europe.

While economists are seeing an “unbalanced” recovery from the pandemic, China’s relatively faster growth – and a population of 1.4 billion people – has more investors looking for opportunities.

JPMorgan China Bond Opportunities Fund portfolio manager Jason Pang said interest in bonds has increased in mainland China, particularly among overseas institutional investors. The fund, which was launched last year, managed client assets of USD 124 million at the end of April.

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“The news hasn’t changed. The only change is that interest changed a lot in the first quarter,” he said. Pang expects the foreign share of the Chinese government bond market to reach 15% in the next three to five years.

If this forecast is correct, far more money will flow into China from overseas.

The foreign share of the Chinese mainland bond market – the second largest in the world after the US – reached 3.44% in April after 3.2% in December, according to Natixis. The company found that foreign investors had net purchases of 58 billion ($ 9 billion) in mainland China bonds in April, reversing more than net sales of 9 billion yuan in March.

Going forward, Citi expects $ 300 billion to enter the market as FTSE Russell officially added China to its World Government Bond Index in October.

More interested in bonds than stocks

According to Vicky Tsai, Head of Securities Services at Citi China, the interest of foreign institutional investors in entering the market has increased.

Since the Securities Commission eased restrictions on a foreign capital investment channel into China in November, demand for the corresponding QFII (Qualified Foreign Institutional Investor) license has increased, she said.

“We have assisted many overseas investors in applying for and obtaining QFII licenses, including several top global hedge fund and private fund management companies with significant investments or plans,” Tsai said in an email.

More access to the Chinese financial industry

Finance is one of the few industries that the Chinese authorities have finally opened up further to foreigners, amid mounting political tensions with the United States

Data from the Rhodium Group released this week showed that U.S. foreign direct investment in China was down around a third year-over-year in 2020, to $ 8.7 billion, its lowest level since 2004.

But Wall Street giants are expanding their China businesses as Beijing has made efforts over the past three years to increase foreign investment in the country’s capital markets and allow foreign firms to better control their local operations.

BlackRock announced on May 12 that it has received regulatory approval to begin asset management in China through a joint venture with a subsidiary of China Construction Bank and Singapore-based Temasek. BlackRock will own 50.1% while Temasek will own 9.9%.

Separately, Bloomberg reported this week, citing a source, that Goldman Sachs has 320 employees in mainland China and Hong Kong. Another 100 jobs are planned later this year, the report says. The investment bank declined to comment when contacted by CNBC.

However, analysts at Natixis noted that business expansion need not necessarily bring significantly more investment flows into China.

A longstanding concern of international investors regarding the mainland market has been its ability to withdraw capital. The domestic financial industry also has a relatively less developed regulatory structure, but remains vulnerable to speculative activity.

“Chinese customers experienced a small boom in the stock market over the past quarter,” said Patrick Pei, chief investment strategist at Hywin Wealth Management in China, in an email. He said mutual funds, a key way in which onshore clients participate in the market, saw record fundraising levels in the first quarter and “sudden dissolution” in the second quarter.

“Overall, we don’t see a significant shift in interest in Chinese government bonds,” said Pei. “Despite factors such as the rhetoric of inflationary pressures from the US and Sino-US political dynamics, the interest rate differential between China and the US is expected to persist, although it is likely to shrink gradually.”

The 10-year US Treasury yield was 1.63% this week, while its Chinese counterpart fell from 3.19% to 3.15%, according to Wind Information.

Clarification: This story has been updated to reflect that Pang expects the foreign share of the Chinese government bond market to reach 15% in the next three to five years.

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