China’s nascent bond market edges forwards

The Shanghai Stock Exchange has announced rules for exchangeable bonds, an innovation in Chinese fixed income markets. It is another step forward in the gradual development of the country's bond markets.

The Shanghai Stock Exchange has announced rules for exchangeable bonds, an innovation in Chinese fixed income markets. An intention of issuance for that type of instrument has already been made by Shanghai-based steel and iron producer Baosteel Group.

Exchangeable bonds are a form of convertible equity/fixed income product. This introduction represents the latest development in the gradual maturing of China’s bond markets.

In its 2013/14 paper ‘China bond market roadmap’, the Asia Securities Industry and Financial Markets Association suggested numerous ways in which China needed to act to improve its bond markets, in particular regarding the two types of government bonds and the two-bond-market structure: the interbank OTC bond market and the exchange bond market.  Industry experts are now seeing some signs of progress.

“There will be a functioning government bond market in China within five years,” said Liu Mingkang, the former chairman of the China Banking Regulatory Commission who currently acts as a research fellow at Chinese University of Hong Kong.  He was speaking at the FT Asset Management Summit in Hong Kong on 20 July 2014.  

“It has been a step-by-step approach that requires liberalisation of interest rates, followed by currency reforms,” he added. “All derivatives will be built on that liberalisation of interest rates. China needs to see a smooth long term yield curve emerging – not like today’s yield curve.”

Development of the bond markets has been helped by the introduction of the Shanghai Free-Trade Zone which was launched on 29 September 2013. It is the first free-trade zone in mainland China.

“I think there has been quite a bit of interest in the Shanghai free trade zone and the potential opportunities that will give the bond markets, said  Tom Jenkins, principal, financial services at KPMG in Hong Kong who was speaking at the TRADE Asia’s recent Asia Clearing Council roundtable. “I think the details around that – perhaps a trading hub or trading activities – have not yet been released.”

As China’s bond markets continue their growth, they have internationalised, via the ‘dim sum’ bond route of issuing a renminbi-denominated instrument abroad. The renminbi qualified foreign institutional investor scheme (RQFII) will in future take a greater role in the spotlight as opportunities to invest within China’s bonds onshore slowly gather pace.

“China’s interbank bond market has been at the centre of the discussions in Luxembourg,” according to Bruno Campenon, the head of BNP Paribas Securities Services in Hong Kong. Approximately 50 renminbi-denominated bonds are already listed in Luxembourg on the back of RQFII. “This also has been a subject of discussion in Hong Kong for some time,” he added.  “It is certainly a major area of interest for investors, and a future consideration for trading connections out of Hong Kong.”