Bond Connect seen boosting fund inflows

Renminbi-denominated bonds will become one of the preferred investment options for international investors as China now offers a channel for offshore investors to access local notes, potentially boosting fund inflows in the future, said experts.

The Bond Connect, which was launched in July in Hong Kong, is expected to funnel hundreds of billions of dollars into the Chinese mainland's $10 trillion interbank bond market, said Zong Liang, a chief researcher at Bank of China, in a research note.

Qualified overseas investors now trade in the mainland's treasury bonds, local government bonds, institutional bank bonds and commercial bank bonds.

Standard Chartered Bank forecast that China's onshore bond holdings will rise to 1 trillion yuan ($153 billion) by this year-end.

Morgan Stanley predicted that the link will put Chinese government bonds on the world's benchmark bond index within the next 36 months, stimulating inflows of $250 billion to $300 billion into the Chinese market.

Citigroup Inc, the fifth foreign institution to receive approval to underwrite nonfinancial corporate bonds in China's interbank market, said there may be "significant" inflows into China's debt market from the Bond Connect.

"We see increasing interest from foreign institutional investors in the China interbank bond market, including corporate bonds," Bloomberg quoted Eduardo Delascasas, Citigroup's China head of markets and securities services in Shanghai, as saying.

China's overall fixed-income market is estimated at 67.6 trillion yuan, which global institutional investors can now access. And capital inflows are rising steadily, said Zong.

But the program may not bring massive foreign capital to China's bond market in the short term, he said.

On July 3, the first day of a trial of the platform, 70 overseas institutions clinched 142 deals worth 7.05 billion yuan, reflecting foreign investors enthusiasm for Chinese bonds.

Volumes, however, fell later to a stable or fluctuation-free daily average of 800 million yuan.

Lacking in experience in the China market, most overseas institutions are still exploring ways of maximizing the potential of the still-new investment channel, said Zong.

In July, Chinese enterprises issued a large amount of US dollar debt overseas, which foreign institutions invested in directly. At the same time, deleveraging in China created risk to bond prices, diluting players' passion for them, he said.