The internationalization of the China corporate bond market – new report from ICMA


14 January 2021 Recognising the increasing importance of China in the global bond markets, and in light of significant reforms and initiatives to attract foreign investors, as well as the inclusion of China in major global bond indices, the International Capital Market Association (ICMA) has published a new report focusing on the trends, opportunities, and challenges related to the internationalization of the China corporate bond market, both onshore and offshore.
China’s onshore bond market, at approximately $15 trillion equivalent of outstandings, is the second largest in the world, after the US. ICMA estimates the overall size of the outstanding onshore credit bond market to be approximately valued at $5.8 trillion of which $3.7 trillion is non-financial corporates and $2.1 trillion are financial bonds.
Market participants interviewed for the report indicate that one of the main motivations for investing in China’s corporate bond markets is the continuing strong economic backdrop and in the onshore market the relatively high nominal returns in comparison to global bond markets where yields are close to zero or negative. A major catalyst for foreign inflows into the onshore bond market since 2019, particularly passive investment flows, has been the inclusion of China in various global bond indices. Among the barriers to foreign investors entering the onshore market are challenges with assessing the credit quality of underlying corporates, which require investors to dedicate time and resources to their own proprietary credit analysis and the incidence and outcomes of corporate defaults. The lack of a liquid secondary bond market is also perceived as a major obstacle to internationalization of the onshore credit market.
ICMA estimates the size of the offshore China corporate bond market to be approximately $752 billion of equivalent nominal outstanding, or around 30% of the total APAC international corporate bond market and 38% of APAC international USD issuance, this issuance is skewed towards financials predominantly in real estate financing. Much of the impetus for Chinese corporates to tap the international debt markets is the result of China’s rapid global economic expansion, and the need to fund overseas investment and acquisitions, primarily in USD. The investor base in this market has diversified in recent years, with more regional and global asset managers looking to diversify their portfolios while seeking out higher returns.

Martin Scheck, ICMA Chief Executive said: “China is rapidly establishing itself as an important part of the global cross-border bond markets, and it is inevitable that the onshore credit market will increasingly attract interest from international investors”.  

The report concludes that while there are multiple challenges for international investors who wish to enter the $5.8 trillion onshore credit market, that are likely to persist in the short-term, they are not insurmountable. The potential for transforming the China onshore credit market into a truly global market is significant.
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