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‘Too big to ignore’: The rise of China’s $12trn bond market

Global index providers are expected to open up to the $12trn (€10.4trn) domestic bond market in the next two years, according to QIC Investment Management. 

The Australian fund manager – set up in 1991 by the government of the state of Queensland – said it expected others to reflect the addition of yuan-denominated government and central bank securities to the Bloomberg Global Aggregate index from next year.

In an investment commentary, prepared in collaboration with China’s Ping An Asset Management, QIC said global investors would be closely monitoring whether FTSE Russell added Chinese bonds to its World Government Bond Index (WGBI), and whether JP Morgan would follow for its Government Bond Index – Emerging Markets (GBI-EM).

The company said these providers were “likely to follow suit in 2019 or 2020” 

Susan Buckley, QIC’s managing director for global liquid strategies, said: “Just as China’s $6trn equity market became too big for the world’s investors to ignore, so too is the country’s $12trn bond market.

“China is the world’s second-largest debt market behind the US.” 

Buckley said QIC saw “excellent” prospects for growth, encouraged by the willingness of China’s national government to increase fiscal spending to offset any slowdown in private and local government investment.

In addition, she said, Chinese local governments raised money from bond issuance.

QIC said authorities had already opened up their bond markets to foreign investors through the Bond Connect initiative, launched last July.

Other reforms had made it easier for foreign investors to repatriate capital unimpeded, the manager added.

On a year-to-date basis, foreign investments in Chinese government bonds reached $48bn in June, far exceeding the annual inflow of $27bn in 2017.

China’s onshore bond market was previously infamously difficult to access. Foreign investors currently own less than 3% of the market, versus an average of 43% across many developed country markets.

Buckley said:  “We estimate that the risk-adjusted returns of the Bloomberg Global Aggregate index would have improved by nearly 15 basis points per annum in the last five years if onshore China bonds had been included.”

QIC has been analysing the Bond Connect trading and settlement infrastructure for several months, and is currently working through the process of Bond Connect registration.

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
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    Closing date: 2019-06-28.

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