Foreign investors buy bonds from mainland China

By on May 21, 2021 0

In 2017, UBS became the first international wealth manager to establish a presence in the Qianhai Free Trade Zone, with the aim of strengthening financial cooperation between Shenzhen and Hong Kong.

Evelyn Cheng | CNBC

BEIJING – Foreign investors and financial institutions are still eager to invest in China despite geopolitical tensions – and much more foreign money could enter the country, analysts say.

Differences in monetary policy and stages of recovery after the coronavirus pandemic have contributed to consistently higher Chinese government bond yields relative to those of the United States and Europe.

While economists note an “unbalanced” recovery from the pandemic, China’s relatively faster growth – and its population of 1.4 billion people – has more investors looking for opportunities.

According to Jason Pang, portfolio manager of JPMorgan China Bond Opportunities Fund, interest in mainland Chinese bonds has picked up, especially from foreign institutional investors. Launched last year, the fund had $ 124 million in client assets under management at the end of April.

“The message hasn’t changed. The only change is that interest changed dramatically in the first quarter,” he said. Pang expects the foreign share of the Chinese bond market to reach 15% in the next three to five years.

If this forecast is correct, a lot more foreign money is expected to enter China.

The foreign share of the bond market in mainland China – the second in the world after the United States – reached 3.44% in April, against 3.2% in December, according to Natixis. The company found that foreign investors bought net $ 58 billion ($ 9 billion) of bonds from mainland China in April, which more than reversed net sales of 9 billion yuan in March.

Looking ahead, Citi expects $ 300 billion to enter the bond market following the official addition of China by FTSE Russell to its global government bond index in October.

More interest in bonds than in stocks

Interest from foreign institutional investors in entering the market has increased, according to Vicky Tsai, head of securities services at Citi China.

Since the securities regulator eased restrictions on an investment channel for foreign capital in China in November, demand for a qualified foreign institutional investor (QFII) license has increased, she said.

“We have helped many foreign investors apply for and obtain QFII licenses, including several leading global hedge fund and private fund management companies with significant investments or plans,” Tsai said in an email. .

Better access to the Chinese financial sector

Finance is one of the few sectors that Chinese authorities have finally opened up more to foreigners – amid heightened political tensions with the United States.

Rhodium Group data released this week showed U.S. foreign direct investment in China fell by about a third in 2020 from a year ago to $ 8.7 billion, the lowest since 2004.

But the Wall Street giants are expanding their business in China as Beijing has advanced over the past three years with efforts to increase foreign investment in the country’s financial markets and allow foreign companies to better control their local operations.

BlackRock announced on May 12 that it had received regulatory approval to begin asset management in China through a joint venture with a subsidiary of China Construction Bank and Singapore’s Temasek. BlackRock will own 50.1%, while Temasek will own a 9.9% stake.

Separately, Bloomberg reported this week, citing a source, that Goldman Sachs recruits 320 employees in mainland China and Hong Kong. There are plans for another 100 positions later this year, according to the report. The investment bank declined to comment when contacted by CNBC.

However, Natixis analysts noted that the expansion of the business would not necessarily lead to much more investment flows into China.

A long-standing concern of international investors in the continental market is their ability to withdraw capital. The domestic financial industry also has a relatively less developed regulatory structure, while still being prone to speculative activity.

“Chinese clients went through a mini-crisis in the equity market this past quarter,” said Patrick Pei, chief investment strategist at China-based Hywin Wealth Management, in an email. He said mutual funds, a major means by which onshore clients participate in the market, experienced record levels of fundraising in the first quarter and “sudden dissipation” in the second.

“Overall, we are not seeing any significant change in interest in Chinese government bonds,” Pei said. “Despite factors such as the rhetoric of US inflationary pressure and Sino-US political dynamics, the rate differential between China and the United States is expected to last, although it is likely to gradually decline.”

The 10-year US Treasury yield held steady near 1.63% this week, while its Chinese counterpart fell from 3.19% to 3.15%, according to data from Wind Information.