HSBC Sees China Accelerating Opening of Bond Market to Overseas Investment

A top HSBC executive sees Beijing stepping up the pace of its opening of the domestic bond market as offshore capital shows greater interest in Chinese debt investment opportunities.

In an interview with STCN.com, Thierry Roland, Head of Global Banking & Markets Americas and Senior Executive Vice president at HSBC North America, said that overseas investors were showing greater interest in the Chinese bond market as access becomes easier.

According to Roland China has effectively cleared the channels for foreign investors to participate in the Chinese bond market.

While in the past overseas investors hoping to invest in China’s interbank market needed to first open an onshore account, they can now invest directly from offshore locations via the Bond Connect scheme that links the Hong Kong and Shenzhen markets.

While China many have removed many of the official impediments to overseas investment in the domestic bond market, Roland nonetheless points out that certain “soft” barriers still exist that lead to foreign capital preferring sovereign bonds and bonds issued by policy banks.

In Roland’s opinion China will need to better “educate” overseas investors in order to attract more capital, so that they are apprised of transaction rules, issuer qualifications, information disclosure and information transparency.

Patrick Burke, CEO of HSBC North America, also notes that the convertibility of the Chinese yuan remains another major barrier to overseas investors.

Burke said that further internationalisation of the Chinese yuan as well as capital account convertibility would be of major benefit to drawing more foreign investors to China’s bond market.

Thierry Roland said that interest in Chinese debt was growing rapidly amongst overseas investors, and that their share of holdings of all domestic bonds in China has the potential to rise to 15%.

Another key component of liberalisation of China’s bond market has been expanding the issuance of offshore bonds by Chinese firms.

Data from Bloomberg indicates that Chinese fund raising via offshore bond issuance has risen to record highs.

In the first half of 2017 Chinese companies raised USD$168.2 billion via 1,334 dollar-denominated bond issuances, as compared to 144 issuances that raised $56 billion during the same period last year.

Analysts say that the rise in dollar-denominated bond issuance is due to the accelerated expansion of Chinese enterprises abroad in tandem with a tightening of capital domestically as Beijing continues to pursue its deleveraging campaign.

Chinese dollar-denominated bonds also provide favourable yields for overseas capital, which is eager to reap the stronger rewards provided by investment in emerging economies.

Despite the flourishing primary market for dim sum bonds however, they continue to suffer from low liquidity due to a constrained secondary market.

Thierry Roland remains unconcerned by this problem, however, pointing out that issuers in the EU and US face similar problems, which is primarily the result of investors being more inclined to hold debt purchased on the primary market until maturity due to transaction regulations introduced in the wake of the Great Financial Crisis.

While exchange rate fluctuations are always a risk for companies whose debt is denominated in foreign currencies, Roland notes that most Chinese issuers of dim sum bonds hold considerable US dollar assets.

Should the US Fed hike interest rates and the greenback rise higher, the returns on such assets would help to offset the higher price of repayment in renminbi terms.

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