On Feb. 24, 2016, the People’s Bank of China announced that offshore commercial banks, insurance companies, securities companies, fund management companies, and pension funds are free to invest in China’s interbank bond market. Previously, foreign investors could only access China’s onshore bond market through a QFII or RQFII quota. The removal of the quota system was first implemented for foreign central banks and sovereign wealth funds in July 2015. This new announcement will further encourage the inflows from foreign investors.
In addition, as China’s currency is now part of the International Monetary Fund’s special drawing rights basket, broader use of the renminbi in trade and finance is anticipated. The global demand for renminbi assets is also expected to continue to grow.
As tracked by the S&P China Bond Index, China’s onshore bond market stood at CNY 38.9 trillion (USD 5.95 trillion) as of Feb. 24, 2016. The S&P China Bond Index rose 8.05% in 2015 and was up 0.64% as of Feb. 24, 2016 (see Exhibit 1). The yield-to-maturity was at 3.08% with a modified duration of 4.02 as of the same date.
Exhibit 1: Total Return Performance of the S&P China Bond Index