It's not about access
Fund managers may say that China's bond market is new territory, but we have been investing there for several years.
Since 2013 we have managed funds that have been invested in the China Interbank Bond Market (CIBM), originally through the use of quotas. As different access schemes, aside from quotas, have been introduced in the past 1 to 2 years, we have been able to move to these more flexible options to trade in the onshore market.
Today, while the interbank market is technically open to all investors, not all managers are yet equipped to execute and settle trades directly in the CIBM. This is due to the detailed operational requirements that are needed onshore which many investors have not yet tackled. Fortunately, having already gone through the onshore operational setup some years ago, it has allowed us to immediately take advantage of the new direct access schemes.
For investors not set up with onshore arrangements, the new Bond Connect scheme offers a solution via the Hong Kong Exchange, giving an indirect link into the interbank market. Whilst convenient in some respects, certain operational limitations eg. Non DVP settlement, may cause issues for investors.
It's about inclusion
From April 2019, Bloomberg has proposed to begin a 20-month process of adding over 300 bonds from policy banks and the government into its Bloomberg Barclays Global Aggregate Bond index benchmark.
The index providers have stipulated some aspects of settlement and tax clarification are requirements before the full implementation.
When completed, international investors that track the benchmark will have to allocate to China's onshore markets.
That amounts to a large commitment as these bonds will account for an estimated 5.49% of the total index, or an projected market value of $2.94 trillion (1)