Foreign Investments in the Chinese Bond Markets

Abstract

<jats:p>The Chinese bond market is the second largest in the world. However, studies on Chinese bond markets are very few, and especially there are no studies on foreign investments in the Chinese bond markets. This study fills the gap in the academic literature by focusing on foreign investments in the Chinese bond markets. By using the least-squares model with breaks, this study finds that although, in theory, the factors of exchange rate, yield spread, and yield correlation should play a significant role in attracting foreign investors to invest in the Chinese bond markets, the specific effects depend on the stage of the Chinese bond markets’ open-up. Initially, the main foreign investors are central banks and similar institutions, and they primarily consider more strategic factors than pure return or risk factors. As more institutional investors have entered the Chinese bond markets, the considerations of enhancing risks and/or reducing risks become more significant. The increasing foreign investments will be beneficial to the Chinese bond markets such as more issuance of longer-dated bonds, thus helping China to establish its RMB bond yield curve, and improving the market efficiency. The Chinese authorities should launch more policy initiatives to attract foreign investors.</jats:p>

The Effects of Foreign Participation on Chinese Government Bond Yields

“…Chinese bond markets have not been studied extensively. Liu (2020Liu ( , 2022 conducted a review on this topic; other research has targeted Chinese bond yields (Porter, Cassola, 2011), the microstructure of Chinese government bonds (Bai, Fleming, Horan, 2013), local government debt (Ang, Bai, Zhou, 2015), government bond yields (Loechel, Packham, Walisch, 2016), the corporate bond market (Luo, Ye, Hu, 2016;Liu et al, 2019;Ding, Xiong, Zhang, 2020), the green bond (Deng et al, 2020), and bond portfolio management (Fan, Jiang, Zhou, 2015).…”

“…The change in market efficiency was likely due to the increase in foreign investment, which helped form a more diverse investor base for Chinese government bonds and, as a result, improved liquidity and brought more diverse trading strategies. Liu (2020) analyzed the development of China's government bond markets from 2015 to 2019, concluding that the major game-changing policy initiative was opening up to foreign investors.…”

“…Chinese bond markets have not been studied extensively (more discussion in Subsection 1.4). Regarding foreign participation, except for (Liu, 2020;2022), there is no relevant literature. In particular, there has been no empirical research on the impact of foreign investment on Chinese government bond markets.…”

The Chinese Government Bond Markets: Foreign Investments and Market Efficiency

“…Responding to the increasing accessibility to China’s bond market for foreign investors as a result of these further opening-up measures, on March 1, 2017 Bloomberg Barclays Benchmark Fixed Income Index family launched new indices to cover Chinese bonds denominated in RMB ( Bloomberg News , 2017). The other two major global bond indices including FTSE Russell World Government Bond Index, and JP Morgan, EM Global Diversified have also included some Chinese onshore bonds (Liu, 2020b). It is part of the Chinese government’s policy of further opening up its domestic markets (Liu, 2020c).…”

“…This figure has increased from 2% in June 2014 to 8.5% in December 2019 and has become comparable to other Asian economies. Liu (2020b) especially examined the determinants of foreign investments in the Chinese government bond market, and found that foreign investors' trading strategies have been evolving. For example, initially the main foreign investors were central banks and similar institutions, and they primarily considered strategic factors rather than pure return or risk factors during June 2014 to July 2016.…”