JPMorgan sees US$500 billion of China debt in global hands by 2020

[SHANGHAI] The opening of China's markets has the potential to boost global holdings of the nation's onshore bonds four-fold to as much as US$500 billion in five years, JPMorgan Chase & Co. estimates.

Overseas institutions held 735.2 billion yuan (US$118 billion) of the debt as of April 30, 2 per cent of the 37.3 trillion yuan outstanding, official data show. By early next year, the holdings may reach US$175 billion, at which point China will surpass Brazil as the world's biggest emerging market for local-currency global bond investors, according to JPMorgan.

Having yuan assets more widely held will support President Xi Jinping's push for the currency to be included in International Monetary Fund reserves this year. The inflows will also provide demand for bonds that the government needs to clean up a regional debt mess and revive an economy growing at the slowest pace since 1990.

"Global real money investors are still very underweight this market due to lack of adequate access, so the potential is huge," said Gu Ying, Hong Kong-based Asia emerging-market strategist at JPMorgan. If rules are simplified, and the yuan gains reserve-currency status, it will attract more foreign investors to buy onshore bonds, he said.

Onshore bonds held by overseas institutions jumped 84 per cent in the 16 months through April, during which time China's bond market expanded 26 per cent, data from the central bank and China Central Depository & Clearing Co. show. Foreign ownership of onshore stocks surged 87 per cent to 644.4 billion yuan.

The central bank cleared 41 foreign institutions, including Pictet Asset Management Ltd and ING Bank NV, for trading on the interbank bond market this year, which already exceeds the 34 approvals in all of 2014, according to the National Interbank Funding Center website.

The Qualified Foreign Institutional Investor scheme, which allows access to mainland markets, is also expanding. The State Administration of Foreign Exchange increased the investment quota given to Fidelity Investments Management (Hong Kong) Ltd to US$1.2 billion in March, the first one to top US$1 billion. The regulator has granted US$74.5 billion in foreign-currency investment quotas and 382.7 billion yuan in renminbi QFII allocations as of May 29.

"What we would love to have is access to the interbank Chinese government bond market," said Donald Amstad, Singapore- based business development director at Aberdeen Asset Management Asia Ltd., which has obtained both QFII and RQFII quotas. "That's the opening of the capital account that we're really focused on. Once the Chinese bond market does open up, it's going to dwarf other bond markets in the region."

The National Interbank Funding Center has allowed access to 108 banks and 13 insurance companies from overseas, as well as 24 QFIIs and 95 RQFIIs, according to its website.

Earlier this month, the PBOC also started allowing overseas yuan clearing and participating banks to access repurchase agreements on the interbank market.

Central banks' concentration of foreign ownership is as high as 91 per cent, Bank of America Corp. wrote in a May 20 report. There is considerable scope to broaden the QFII and RQFII programs, which could help drive holdings by overseas investors to as much as 20 per cent in 10 years, it said.

China is not far from realising the goal of capital account convertibility, and the PBOC will push for the yuan's inclusion in the IMF's Special Drawing Rights basket, according to a report posted on the central bank website on June 11. The monetary authority is looking at removing quota limits on foreign central banks' investments in the interbank bond market, according to the report.

The yuan has traded around 6.2 a dollar in the past three months even as the nation's economy heads for the weakest annual expansion in more than two decades. This comes as the nation looks to convert 2 trillion yuan of high-cost debt into cheaper municipal bonds this year.

"Stability makes a lot of sense in terms of opening the capital market and making the yuan a reserve currency," said Paul McNamara, an investment director based in London at GAM, a group that has US$127 billion in assets. "Onshore Chinese government bonds are very interesting. Internationalising China's finances is a priority for the government and they are doing it in a deliberate way."

BLOOMBERG