Derivatives Heighten Lustre of Chinese Debt for Offshore Investors


Rapid growth in derivatives for Chinese bonds is helping to enhance the appeal of China’s $10 trillion debt market to offshore investors.

A sharp decline in pries for fixed-income assets over the past several years in tandem with rising volatility has spurred rapid growth in the market for derivatives, as Chinese traders search for new methods to firm up profits.

Data from Chinabond indicates that China’s bond traders enjoyed total returns of 11% in 2015, yet this level plunged to 8% in 2016 and 1.3% this year, as the Chinese central bank strives to contain systemic financial risk and crackdown on leverage.

Chinabond data indicates that yields for 10-year government bonds have risen 57 basis points since the start of the year to 3.58, following a 19 basis point increase in 2016.

Le Huajun, an investment manager at Bluestone Asset  Management, said to Bloomberg that traders are increasingly availing themselves of derivatives such as futures and swaps to earn money off bonds.

According to market observers the increasing use of futures and interest-rate swaps is a sign of the maturation of China’s bond market, heightening its appeal to the foreign capital that Beijing so keenly hopes to attract by means of initiatives such as Bond Connect.

While the interbank market is all but completely accessible to overseas investors, foreign holdings of China’s domestic bonds still stand at under 2% due to a lack of sufficient hedging tools in the form of a fully mature derivatives market.