CHINA
China Insights – Market structure
April 20, 2021
4 Mins Read
by Eurizon SLJ Capital’s China Bond Team
Exploring the unique nature of the
Chinese onshore bond market
Since the inclusion of Chinese bonds into
major global fixed income indices, we have
witnessed a steady increase of international
investors’ allocation into China’s US$ 17trillion*
bond market. Despite its size, China is
currently under-owned, with foreign investor
participation accounting for just over 3% of
the entire bond market. This is about to
change.
China’s recent efforts to speed up the
post-pandemic recovery and internationalise
the country’s bond market, coupled with
consistent low correlation and attractive
yields offered by Chinese bonds compared to
other bond markets, represent for global
investors a compelling opportunity to
diversify their global portfolio.
More importantly, Chinese bonds have behaved
like a safe-haven asset during times of
market stress (shown in the chart below). We
estimate that, over the coming 5 years,
total flows into the RMB bond market could
reach US$ 2trillion**.
Resilience in times of market stress
China bonds have behaved like a safe-haven
asset during major crises and periods of
market stress. In the chart below, we show
the total return of asset classes in GBP
terms.
Let’s look at how the Chinese bond market is
organised and who the major players are.
China has two types of bond markets: the
onshore market, which is CNY-denominated,
and the offshore market, including both
CNH-denominated and USD-denominated bonds.
The onshore bond market can further be
divided into the China Interbank Bond Market
(CIBM) and the exchange-traded bond market.
90% of all domestic bonds are traded on the
CIBM, which boasts the highest trading
volumes.
As illustrated below, the onshore market is
more prominent, the size of it is 17 times
as big as the offshore market. The onshore
bond market provides greater diversification
in terms of bond categories, better
liquidity and a more developed market depth.
As the second largest bond market in the
world, it is still growing in terms of
issuance, trading volume and investors, due
to the ongoing local policymakers’
commitment to facilitating foreign
investors’ access.
Market size
In stark contrast to most other bond
markets, almost 60% of the Chinese bonds are
considered “rates” products (bonds issued by
governments and policy banks, hence with
limited credit risk), while only 40% are
“credit bonds”, bonds issued by commercial
banks and corporates.
Key market segments:
Policy Bank Bonds
Policy Bank Bonds are issued by the three
policy banks and are the most actively
traded segment. Though not technically
sovereign bonds, they are viewed as
quasi-government bonds and with implicit
guarantee. They provide the better liquidity
among the four sectors and higher yields
compared to both government bonds and local
government bonds, however, they share the
same international ratings as Chinese
sovereigns.
Central Government Bonds (CGBs)
CGBs are, like the US Treasuries, the
risk-free sovereign bonds, carrying explicit
central government guarantees. Relatively
liquid, up to 50Y, they represent the second
most actively traded segment and are
preferred by foreign investors as they
initiate their exposures to Chinese bonds,
especially the ultra-long end.
Local Government Bonds (LGBs)
The local government debt market is large,
but fragmented, like Munis in the US. Local
government bonds are the least liquid and,
generally, offer slightly higher yields than
government bonds, but lower yields than
policy bank bonds.
Corporate Bonds
Corporate bonds, including NCDs (negotiable
certificate of deposit) issued in China
account for more than 40% of the market.
Most of the corporate bonds are from
state-owned enterprises (SOEs), and the
quality and liquidity can vary.
In the next article we will look into more
details on each of these segments and the
different options for foreign investors to
access the Chinese local bond market.
* Source: WIND as at 31st March 2021
** Source: Eurizon SLJ Capital
estimations as at 31st March 2021