China bonds tipped for inflow jump within three months

Global investors are set to boost their participation in the China interbank bond market (CIBM) in the next three to six months, with banks and insurers leading the way, say BNP Paribas executives.

Asian assets have become a safe haven for investors after Britain voted to leave the EU on June 23, and low yields among the International Monetary Fund’s special drawing rights (SDR) currencies will push investors into renminbi bonds, said CG Lai, head of global markets for greater China at BNP Paribas.

CIBM participation by banks and insurance companies is likely to jump in the next three months, he added, because they trade on their own account, so their application procedure is simpler than that for fund managers.

European asset managers want to take advantage of relatively high Chinese bond yields, but Ucits funds need regulatory approval to make such allocations, noted Lawrence Au, executive adviser for Asia Pacific at BNP Paribas Securities Services.

In addition, regulators in Luxembourg and Dublin need time to understand the newly opened CIBM, he said at a media briefing in Hong Kong yesterday.  

Asset managers will need to revise fund prospectuses to disclose the risks associated with the CIBM programme, added Au, but Ucits products – such as emerging market bond funds – are likely to start allocating to the market within three to six months.

Asian asset managers, who access China via the qualified foreign institutional investor (QFII) and renminbi-QFII, are preparing documentation for the CIBM, said Hong Kong-based Au. “It makes no sense for them to apply for additional quota under restrictions,” he noted. 

But some firms, such as Axa Investment Managers, said they still needed RQFII quotas to access exchange-traded corporate bonds, as reported.

Despite the surprise relaxation of CIBM rules in February, foreign investors are taking a relatively slow approach to entering the market. The Monetary Authority of Singapore and UK-based fund manager Insight Investment have been early movers into the world’s third largest bond market via the new access programme.  

Shanghai-based Lai said the global low-interest-rate environment was forcing investors to seek higher yields and onshore renminbi bonds offered the highest returns among the SDR currencies.

The average 10-year bond yield of the SDR currency basket is 1.8%-1.9%, while China is offering 2.8%, the highest in the basket. (The SDR basket bonds are US treasuries (41.73%), German bunds (30.93%), China government bonds (10.92%), Japanese government bonds (8.33%) and UK gilts (8.09%).)

Moreover, Lai said most investors expected interest rates to go even lower.

However, he conceded that mainland onshore bonds would not be appealing if investors were to hedge out the currency risk. Yet the renminbi has weakened 2.8% against the dollar this year, as of yesterday.