China Bond Market Primer: Entering the world's second largest bond market

Overview 

China’s bond market reached $17 trillion in Q3-2020, making it the world’s second largest market after the US. The low market cap to GDP ratio compared with other markets suggests still significant growth potential ahead

There are three markets for RMB bonds, along with an active offshore market for hard-currency credits. Rates and credit bonds are roughly of equal size, and predominantly owned by banks and mutual funds

Foreign holdings represent c3% of the market and have grown rapidly in recent years. Foreign buying has so far concentrated in government bonds, supported by China’s relatively high interest rate differential and index inclusion. Investment in onshore credit has progressed slowly due to more complex risk considerations 

China has recently been added to all major international bond indices, and global reserve managers have started to allocate to RMB bonds for diversification. These secular trends are still in their infancy and could develop rapidly as China further opens its markets and investor confidence in RMB assets grows  

RMB bonds have delivered solid performance relative to other markets. With onshore interest rates already back to pre-COVID levels and RMB on an appreciation path, China offers good returns prospects in a zero-rate environment. Our analysis shows that adding China to a global fixed income portfolio can visibly enhance its risk-return characteristics

China is home to the world’s largest green bond market, with 2019 issuance accounting for over 20% of the global supply. While there are still some discrepancies between local and international standards, a large swarth of the market is aligned with the global recognition of “green” and offers attractive risk-adjusted opportunities