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.
