China's removal of a number of barriers preventing foreign institutional investors from buying onshore bonds is expected to lead to dramatic inflows from overseas investors.
According to Jan Dehn, head of research at emerging markets fund manager Ashmore, the opening up of the onshore bond market should trigger a rapid increase in the proportion of local bonds owned by foreigners, which stood at 1.6% in November 2015. Foreigners own a third or more of domestic bonds in emerging markets such as Indonesia and Mexico.
Inflows would be timely, he says, because, "due to a combination of prejudice, ignorance and overly conservative and inflexible investment practices, most institutional investors still have no meaningful onshore exposure in China".
The changes mean that most foreign institutional investors, including banks, asset managers, pension funds and others, are eligible to enter China's onshore bond market, including the interbank market as well as the on-exchange market. Approval is now granted at registration and pre-approval is not needed.
Some obstacles remain, such as short minimum holding and withdrawal periods, which may prevent Chinese government bonds being included in main benchmark indices.
However, should an index provider such as JP Morgan add Chinese onshore government bonds to its global emerging market bond indices, Dehn predicts China's weight could be as much as a tenth.
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