Investment in policy bank bonds rises

Overseas investment in Chinese policy bank bonds has been rising sharply as institutional investors recognize their liquidity and investment value, experts said.

A total of 103.5 billion yuan ($14.52 billion) of foreign capital has flowed into the Chinese policy bank bonds market during the first seven months of the year, hitting a record high both in size and growth rate, according to Bloomberg's calculations.

The three main policy banks — China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China — were established during the 1994 banking reform to assume responsibility for financing economic and trade development and State-invested projects.

Over the past 12 months ending July 31, Bloomberg's statistics show that overseas institutions had increased their investment in bonds issued by China Development Bank by 62 percent. During the same period, their investment in Chinese government bonds went up 19 percent.

Li Bing, head of Bloomberg China, said that overseas investors' move toward policy bank bonds in China illustrates their greater acceptance of the Chinese bond market, recognizing a significant step forward in terms of risk control.

The amount of bonds issued by Chinese policy banks is quite large and keeps a steady pace, so they promise good liquidity, explained Li. Overseas investors have recognized the liquidity and value of such bonds given the continued capital inflow over the past few months, he said.

More important, the increasingly vibrant Chinese policy bank bond market has shown that overseas investors are changing their investment strategies in China, said Li. They chose to wait and see in the early days and most of them started to test the waters by investing in government bonds. But now their participation in the policy bank market indicates that their probe of the market has been successful, he said.

Overseas investors will go further down the credit structure to look at the opportunities in Chinese corporate bonds, said Li.

"We have seen solid numbers for that trend, with rapid progress made," he said.

The overall sentiment of overseas investors in the Chinese bond market outlook remains high. According to China Central Depository and Clearing, overseas institutions held nearly 1.7 trillion yuan worth of Chinese bonds via CCDC's trust accounts by the end of July, up 3.2 percent from a month earlier. It is the eighth consecutive month that overseas institutions have increased their investment in Chinese bonds.

Also, another 96 overseas institutions joined the bond connect program in July, with the total number of such overseas institutions exceeding 1,100. The total trading volume of the bond connect mechanism reached 201 billion yuan in July, hitting another record high. The bond connect program between the Chinese mainland and Hong Kong markets was launched in early June 2017.

Statistics from the China Foreign Exchange Trade System show that a total of 2,085 overseas institutions had entered the Chinese interbank bond market by the end of July, with their total investment rising 18 percent year-on-year to 435.3 billion yuan.

Sun Guofeng, head of the monetary policy department of the People's Bank of China, said that given the relaxed currency policies in most developing economies, only China keeps its currency stable. On top of that, most renminbi assets are undervalued so China will hopefully become the hot spot for global capital.

David Beale, Asia-Pacific co-head of CIB's Institutional Client Group at Deutsche Bank, said that 27 percent of the bonds in the world now provide negative yields. As most overseas economies have cut interest rates, renminbi bonds will continue to be lucrative for overseas investors, he said.

While concerns were expressed about the possible impact of the fluctuations in the renminbi exchange rate, Beale said that overseas investors will only be affected by disordered and acute ups and downs in the exchange rate.

"The renminbi exchange rate went through some dramatic swings in 2015, which resulted in the conservative attitude of overseas investors regarding the Chinese market. But the situation is totally different now. The renminbi exchange rate has been undergoing mild and orderly fluctuations," he said.

"Overseas investors keep a close eye on the Chinese policies. Given the number of investor guidelines and new policies, they have much confidence and high expectations in policy transparency. They will attach more importance to the Chinese market," he added.