Market veterans say foreign investors are unlikely to rush through the door China's regulators just opened to the country's huge, and fast-growing, domestic bond market.
Even so, if China's A-shares market has hogged the limelight in recent years, it's the bond market that's set to attract a growing following among institutional investors globally in coming years, they say.
It's “too big to be ignored,” with the added advantage of being very institutional, said a Shanghai-based credit trading specialist with a foreign bank, who declined to be named.
“The onshore bond market is made up predominately of institutional investors' assets while the onshore equity market is dominated by individual investors” — a very different dynamic, agreed Arthur Lau, Hong Kong-based co-head of emerging markets fixed income and head of Asia ex-Japan fixed income at PineBridge Investments.
Still, analysts predict it could take a bit of time before the policy details of China's bond market opening are sufficiently clarified and foreign investors can position themselves to invest.
“I don't see any rush,” said Clifford Lau, Columbia Threadneedle Investments' Hong Kong-based head of fixed income, Asia-Pacific. For example, the new rules call for offshore asset owners and money managers to engage with local custodians to facilitate transactions, requiring due diligence on both sides of the relationship, he noted.
Offshore investors, meanwhile, need time to come to grips with how China's bond market operates.
How quickly offshore institutional money flows to China's bond market will depend, in part, on the “amount of time it takes investors to understand the market dynamics and accumulate knowledge about how this market trades and how (the risk-return profile there) relates to their other market allocations,” said Linan Liu, Hong Kong-based strategist with Deutsche Bank.
They might find some of the answers to those questions to their liking, such as the low correlations between China's bond market and other major fixed-income markets around the globe, including the U.S. market, said Binay Chandgothia, a Hong Kong-based portfolio manager for Principal Global Investors' multiasset advisers boutique.
Mr. Chandgothia said foreign investors will find “sizable opportunities in the fixed-income markets in China, especially on the credit side.”
Deutsche Bank's Ms. Liu agreed. With the Chinese government looking to promote direct financing through bond issuance in lieu of bank borrowing, she predicted growing interest among foreign insurance companies, pension funds and endowments in China's corporate credit sector — at RMB13.5 trillion ($2.07 trillion), already a quarter of China's overall bond market, and its fastest growing segment.
Z-Ben Advisors, a Shanghai-based consultant on financial market opportunities, cites the onshore RMB credit market as the biggest, most immediate, untapped opportunity in the mainland market, with the potential to attract $1.3 trillion in foreign investments over the next five years.
The weakness of the renminbi over the past year remains an obstacle to those flows, as long as China's government prohibits foreign investors from using onshore hedging tools, such as derivatives.
