China Insights – Market structure

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

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