Insiders Are Optimistic About Long-Term Investment Opportunities in Mainland-Hong Kong Bond Connect

Huang Chengjing, Luo Qi / Yicai

2017-05-18

(Yicai Global) May 18 -- The upcoming opening of the bond market connect between Chinese mainland and Hong Kong reflects the steady opening of China’s bond market, say Hong Kong market insiders. For overseas investors, the long-term investment opportunities are immense although there might be big fluctuations in the short term.

Over the next five years, the average annual international capital inflow in China's bond market is expected to exceed USD80 billion, the macro and fixed income team of China Merchants Securities estimate.

The channels for investing in China's onshore bond market is continuing to expand, and the programs that China has launched, such as Qualified Foreign Institutional Investor (QFII), RMB Qualified Foreign Institutional Investor (RQFII) and China Interbank Bond Market (CIBM), and the upcoming bond market connect reflect the steady opening and healthy development of China’s bond market, said Bryan Collins, fixed income fund manager at Fidelity International.

Collins was speaking yesterday at a meeting of some fund managers, lawyers and tax consultants, organized by the Hong Kong Investment Fund Association (HKIFA), a nonprofit trade association representing the Hong Kong fund management industry, to discuss opportunities and possible changes the opening of the bond market connect may bring to China and the international bond market.

The continued growth of China’s bond market has brought a lot of new opportunities for investors, Collins said. As the correlation between Chinese bonds and the yuan as well as other asset classes and currencies is low, the market prospects are considerable, he predicted.

“At present, the risk-adjusted return in yuan on short-term Chinese treasury bonds is very attractive, and the yield on long-term treasury bonds is expected to rise. Once the yield on the 10-year treasury bonds rises to more than 3.6 percent or more, it would be a good time to buy,” said Collins. “In addition, as the market expected the mainland’s interest rates will rise, the yuan exchange rate next year is likely to remain stable, so assets denominated in yuan are expected to provide good overall returns over the next few years,” he added.

The deleveraging in the mainland financial market is an important positive measure in financial market reform, said Xu Zifeng, Asian bond fund manager at Schroder Investment Management. Coupled with other measures to promote the development of the bond market, China's bond market is attractive to international investors in the long run.

However, the market tends to think that China's bond market is not perfect, pointing to problems such as lack of transparency, low liquidity, and no universal international credit rating system, said Xu Hanhua, Hong Kong operations manager at Fullgoal Asset Management. Therefore, the demand for treasury bonds is higher than that for credit bonds with higher risks, he believes.

From the perspective of the feasibility of practical operation, Xu believes that China will further develop cooperation with onshore and offshore bond settlement and clearing agents and market infrastructure suppliers to attract more foreign investors to enter China's onshore bonds market.

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