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Opening the black box: China’s onshore bond market

China is home to the second largest economy and the third largest bond market in the world—the latter being inaccessible to offshore investors until recently. In November 2015 the International Monetary Fund (IMF) approved the Renmibi (RMB) as a global reserve currency. Following shortly thereafter, the RMB bond market was opened to foreign investors.[1] After being veiled in secrecy for so long, what tools are available to study this vast bond market?

FTSE Russell launched the FTSE China Onshore Bond Index Series in March 2015 with data going back to December 2011. This index series is designed to provide an independent benchmark on the Chinese onshore RMB bond markets. The series offers data on both the sovereign and the Policy Bank bond markets in China. These indexes can be used to get a clearer historical picture of how the China onshore bond market behaves relative to its European counterparts.

The first characteristics market participants typically look at when analyzing bond markets are duration and yield. As illustrated below, while durations for European bond indexes have been consistently higher than China’s over the four-year period, they have also experienced greater fluctuation. 

 Source:  FTSE Russell. Data as of December 30, 2015.

In addition, further data reveals that the 2.92% yield on the onshore China bond market as of February 29, 2016 was higher than Spain’s 1.55%, Italy’s 1.43% and even the more stable countries of France at 0.67% and the UK with 1.84%. And while the European countries have seen yields steadily decrease in the last four years, China’s is only marginally lower than it was in 2011.

After duration and yield, market participants will often want to look at correlations with other asset classes. As correlations within European bond markets have increased over the last three years[2], their correlation with the Chinese onshore bond market has fallen and is currently near zero as seen in the graph below.
 

Rolling 1-Year Correlation with FTSE China Onshore Bond Index

 Source: FTSE Russell. Data as at February 29, 2015. Past performance is no guarantee of future results. Returns shown may reflect hypothetical historical performance. Please see the dislaimer for important legal disclosures.

Of course, an investment in this market is not without risk as currency exposure is an important component to consider when evaluating any foreign investment. Given China’s recent currency devaluations in August of 2015 and January of 2016, evaluating this risk is especially critical. 

As the Chinese economy seems to be easing its restrictions on offshore investors, certain market participants may find this data revealing low correlations with other bond markets, lower durations and higher yields of interest when assessing their investment options..  

For additional research on this topic, please see the FTSE Russell Insights paper, China Onshore Bonds.

 

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[1]King & Wood Mallesons.  

[2]Source: FTSE Russell Insights.  Data as of January 4, 2016.  Past performance is no guarantee of future results. Returns may reflect hypothetical historical performance. Please see the end for important legal disclosures.

 

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