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“Give me more China data” investors demand

“Give me more China data” investors demand

(9 November 2018 - Asia) Fund managers who took part in FinanceAsia’s inaugural Bond Connect survey 2018 revealed they are keen to explore opportunities in China’s domestic market but a deep dive into the statistics indicates there’s still some hesitation. 

Just 31% of investors polled by FinanceAsia, had invested in China’s onshore bond market; and of those, just over half (54%) said their managed portfolios contained 10% or less, of local bonds.

This indicates that Bond Connect still needs to do more to attractive foreign investors and to deepen their investment in domestic bonds. Twin factors dampening foreign investor enthusiasm include China’s macro economic outlook and the need for risk-adjusted returns to become more attractive.

Drilling down into the data reveals risk is a significant concern. These include counterparty risk (delivery-versus-payment), creditor rights (legal system and covenants) and the lack of differentiated credit ratings. Almost 41% of respondents did not rate the mainland’s credit rating agencies while three other local ratings agencies rated poorly (between 7-11.1%).

And it’s not just foreign investors who are distrustful of China’s domestic ratings agencies.

Even domestic investors have trust issues, according to East and Partners Asia’ lead analyst Sangiita Yoong. “Anecdotally, I’ve heard that in China’s local market even local investors don’t really trust the local bond credit rating, so it’s not just an issue for foreign investors. China’s default rate has increased recently and is projected to increase further,” Yoong says.

Despite these issues, foreign holdings in Chinese government bonds (CGBs) topped Rmb1 trillion ($146.26 billion) in July 2018 and foreign investors were the largest buyers for these bonds in the first half of the year, with demand increasing month-on-month.

On the ratings front, Yoong believes there’s some good news in the offering. “There is talk about entry of foreign ratings agencies such as Standard & Poor’s and Fitch Ratings and if they were to come into the China investment market, they would definitely give greater assurance to China’s onshore bonds.”

To learn more about investors’ apprehension to Bond Connect and the in-depth research conducted by FinanceAsia’s research partner East & Partners Asia, please contact Keith Frith (keith.frith@haymarket.asia), commercial director for more information.

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