China To Allow Foreign Investors to Trade Exchange Market Bonds in Plea to Stop the Bleeding

Chinese bonds saw outflows since the yield differential shrank with US rates rising coupled with the risks associated with China’s tacit approval of Russia invasion of the Ukraine. Global funds slashed their holdings of Chinese bonds. Goldman Sachs Group Inc. trimmed its bond inflow forecast for China to $100 billion this year, from as much as $140 billion. In response China will allow foreign institutional investors to trade bonds on its smaller exchange market. The PBOC said the move would “help expand capital inflows to China,” it added.

PBOC
PBOC Headquarters

The Two Chinese Bond Markets

Interbank Bond Market

Foreign investors have been allowed since 2016 to invest in the country’s interbank bond market, which accounts for 86% of the China’s total domestic bonds. The other 14% is traded in the exchange market, according to a report last year by the International Capital Market Association and China’s Association of Financial Market Institutional Investors.

Exchange Market

The exchange market includes enterprise asset-backed securities which aren’t traded on the interbank market. China’s securities regulator plays the major role in regulating the exchange market, while the interbank market is mainly regulated by the PBOC.

China will for the first time let qualified foreign institutional investors include central banks, sovereign funds, commercial banks and pension funds. These investors will now be allowed to invest in bonds on the exchange market, the People’s Bank of China (PBOC) said in a statement published on its website.

Chinese Bonds Dumped

Global funds sold record amounts of Chinese sovereign debt in February and March as their yield premium over Treasuries collapsed and money managers. The tacit approval of the Russian invasion of Ukraine adds to the Sovereign risk of this debt. China’s strict zero-Covid policy with widespread lockdowns since March always adds to the risk along with food and energy shortages fueling potential civil unrest. This factor has also factored into the CCP strict lockdowns.

Chinabond earlier this month showed foreign investors sold 42 billion yuan of Chinese government bonds in April. While the outflows narrowed from March, it marked a third straight month of selling by overseas funds. That was the longest string of monthly selloffs since 2015. 

The weakened Chinese Yuan also puts at risk any investments in China given the foreign Exchange loss potential. The offshore yuan fell 1.5% against the dollar last week, its biggest weekly drop since 2020.

Chinese Premier Li Keqiang’s pleas to arrest the grim slide facing China’s economy this week highlights the risks the China is facing amid stringent covid lockdowns, a property credit crisis and waning exports. 

Source: Bloomberg

From The TradersCommunity Research Desk