[Video] Our latest Asset Class Spotlight on fixed income strategies

Moving on to China, we analyse developments in the Chinese onshore bond market and its accessibility to foreign investors. Don Yew, our Singapore based manager research analyst shared his views on the Chinese onshore bond market in the video below.

Don Yew: In our latest asset class spotlight on fixed income funds, we dived into the emergence of China’s growing onshore bond market, which is underpenetrated by foreign investors.

At 10.5 trillion US dollar, China’s bond market is the third largest in the world, behind only the United States and Japan, and is made up of both offshore and onshore segments.  The offshore market consists of US dollar and CNH-denominated debt, while the onshore market is composed of CNY-denominated debt.

Investor’s appetite for dedicated RMB Bond funds has declined in recent years, triggered by the Chinese central bank’s surprise devaluation of its currency in August 2015,  as funds across all three RMB bond Morningstar categories saw net aggregate outflows of 2.6 billion dollars between September 2015 and November 2017.

Foreign investors have historically participated in China’s bond market via the significantly smaller offshore universe.  The onshore market is relatively under-penetrated, with foreign investor ownership of only around 3%. However, the onshore bond market has become more accessible to foreign investors over the years.

The introduction of ”qualified foreign institutional investor” and “renminbi qualified foreign institutional investor” programs were followed by further liberalization of China on in February 2016, and more recently, the launch of the Hong Kong-China bond connect scheme in July 2017, which allowed foreign institutional investors to trade in the onshore bond market without repatriation limits.

Another tailwind for China onshore Bonds include the potential inclusion of it in global bond indices, which could fuel heavy inflows into passive funds.

Furthermore, the International Monetary Fund has added the RMB to its basket of reserve currencies in its Special Drawing Rights basket, which will likely see the currency feature more prominently in global trade.

We believe these developments will drive greater accessibility and investor demand for the asset class.  As accessibility to onshore bond market continues to improve, we are likely to see CNY-denominated credits play a bigger role in dedicated RMB bond funds, majority of which still invests heavily in offshore CNH- and USD-denominated credits within their portfolios.

Another encouraging trend that we have observed is that an increasing number of Asian bond asset managers within our coverage have been actively building out dedicated onshore credit resources via wholly foreign-owned enterprises, as they noted plans to invest more actively in the onshore market. 

With asset managers dedicating more resources to the asset class and accessibility improving, we believe that the continued growth of RMB bonds will broaden the investable universe for emerging market and global local-currency bond funds. Hence, asset managers will be able to potentially leverage this additional alpha source to construct a more diversified portfolio and deliver better outcomes for investors.