Asia Fixed Income: Foreign Investor Access to Onshore Chinese Bond Markets Grows

China continues to broaden foreign investor access to their onshore bond market. Luxembourg is the latest country being granted an RQFII quota by the People’s Bank of China, followed Canada, Germany, Qatar and Australia.  According to the data published by State Administration of Foreign Exchange (SAFE) on April 29, 2015, the approved RQFII investment quota reached CNY 363 billion, representing a 22% increase from December, 2014. The number of the qualified institutions also rose from 93 to 121.

Among the qualified participants, Hong Kong remains to be the biggest player, with an RQFII quota allocation of around 74%, see exhibit 1 for the country breakdown. Outside of Hong Kong, the most significant development observed was by South Korea, with its approved quota jumping 10 times to CNY 30 billion, while the number of the qualified institutions climbed from 1 to 14 since last December.

In sync with the opening up of its capital markets, the China onshore market has recorded substantial growth in recent years. Tracked by the S&P China Bond Index, the market value of the China onshore bond market reached CNY 28 trillion, as of April 30, 2015. This market has expanded 22% since last year and more than three times since the index first valued on December 29, 2006. The market value tracked by the S&P Japan Bond Index, representing the other giant market in Asia, gained 2.6% and 37% respectively.

In terms of total return performance, the S&P China Bond Index rose 2.14% year-to-date (YTD), after a 10% gain in 2014.  Global investors seem to continue to favor Chinese bonds as they offer relatively higher yields as compared to markets globally. The index’s yield-to-maturity currently stands at 3.91%, compared with 0.27% yield-to-maturity from the S&P Japan Bond Index. Please see exhibit 2 for indices comparison.

Exhibit 1: Country Breakdown of the Approved RQFII quota from State Administration of Foreign Exchange (SAFE)

Source: State Administration of Foreign Exchange. Data as of April 28, 2015

Source: State Administration of Foreign Exchange. Data as of April 28, 2015

Exhibit 2: Indices Comparison

 S&P China Bond Index  S&P Japan Bond Index
 Calculated Currency  CNY  JPY
 Market Value  7,866,324,806,704  1,119,159,373,390,670
 Yield-to-Maturity  3.907%  0.273%
 1-Year Total Return  9.262%  2.475%

Source: S&P Dow Jones Indices. Data as of April 30, 2015

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