Expats and Tourists: China’s Bond Market After Index Inclusions

Including RMB-denominated bonds in global indices has fundamentally changed the investor base of China’s onshore bond market. The new participants include both institutional investors delivering stickier passive capital inflows and improved market liquidity (the “expats”), along with more fickle “tourists”, particularly among emerging market investors interested in the higher yields and improving market conditions on offer. The implications of these changes to the investor base include:

• The recent wave of capital outflows resulting from China’s narrowing yield spreads to Treasuries is more likely sourced from “tourists”. As a result, portfolio outflows from foreign investors may moderate in the months ahead.

• There are still good prospects for additional medium-term passive inflows as more bonds are included within global indices. Portfolio securities deficits under the balance of payments should narrow in the next 2-6 quarters.

• The fear of capital outflows has likely pushed regulators to accelerate some modest improvements to market conditions for foreign participants, in the expansion of trading hours and access to OTC derivatives.

Posted August 19, 2022
Share
Facebook Twitter Pinterest

Capital Outflows and an Unfriendly Fed

The changes in China’s international payments have been significant in 2022—strong trade and portfolio inflows have shifted toward weaker exports and surging capital outflows. Foreign investment flows in China’s equity and bond markets are now the most important variable in China’s international payments, with direct implications for the exchange rate. But with rising US bond yields and the Federal Reserve hiking interest rates, Chinese securities are far less attractive, given lower returns alongside new political risks.

Posted June 30, 2022
Share
Facebook Twitter Pinterest