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Citigroup sees 'significant' inflows into China bond market

[SHANGHAI] Citigroup Inc, which obtained a bond underwriting license in China last month, said there may be "significant" inflows into China's debt market after the government started another channel for offshore investors to access local notes.

The US bank became the fifth foreign institution approved to underwrite non-financial corporate bonds in China's interbank market last month. In July, overseas investors were allowed to invest via Hong Kong through the bond-connect program in the bigger of China's two debt markets, which has US$8.2 trillion of outstanding securities, about 89 per cent of all the notes in China.

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

"The recent launch of Bond Connect as an additional channel to access the China interbank bond market has aroused renewed interest. In this sense, as market conditions improve, we expect to see significant inflows."

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China has accelerated opening of the world's third-biggest debt market to help counter capital outflows and promote greater use of the yuan. Higher bond yields onshore are attracting foreign investors. The yield on the nation's 10-year government bond has risen to 3.62 per cent, widening the gap with US Treasuries of similar maturity, whose yield has declined to 2.2 per cent.

Overseas investors increased their China onshore bond holdings by 62 billion yuan (S$12.67 billion) in the second quarter after a reduction of 22 billion yuan in the first three months of this year, according to central bank data.

Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong, estimates foreign holdings of onshore bonds may exceed 1 trillion yuan this quarter, according to a report this month.

"We are already participants in the underwriting business for asset-backed securities and panda bonds and this license will help us to further enhance our ability to serve our corporate clients requiring financing," said Mr Delascasas.