Much was made in the mainstream financial media of a pending Lehman-like crisis when Chinese property developer Evergrande was reportedly on the verge of collapsing under the weight of its something like $300 billion debt pile.
Well, the Chinese regime has managed to contain the damage so far.
But with Chinese economic growth decelerating from cyclical and long-term perspectives, it got John Johnston thinking about the actual makeup of government and corporate Chinese bond markets.
What follows are hard numbers and charts from the Economic Advisor at Davis Rea Investment Counsel, that show the rapid development of the Chinese bond market and that foreign participation in that market, while still relatively low, is growing.
· Chinese financial markets have developed rapidly in recent years, both relative to the size of the Chinese and the global economies.
· As of June 2020, the Chinese onshore bond market had a market capitalization that exceeded that of the UK, France and Germany combined.
· Reforms in Chinese financial markets, and inclusion of Chinese equities and bonds in major global indexes, have improved access to, and increased foreign participation in Chinese markets.
· However, as of July 2020, the level of foreign participation remains low compared with emerging market peers.
· Remaining capital controls and concerns about secondary market liquidity may also be restraining foreign participation in the Chinese bond market.
· Further deregulation and liberalization of the Chinese capital account would likely increase financial integration of Chinese markets with global markets and increase foreign participation.
· Low foreign participation may have reduced the exposure of Chinese bond markets to the global financial cycle, and partly caused their relatively low correlation with G7 bond markets, giving portfolio diversification benefits.
· Chinese government bonds have offered investors favourable risk-adjusted returns and bond yields in renminbi provide a significant yield premium over G7 yields.
Table 1: China Now Included in Three Major Global Bond Indices
· China issued foreign bonds from 1861-1950 to finance military expeditions.
· The first domestic government bonds were issued in 1950. But that issuance was then suspended until the liberalization reforms of 1979 paved the way for domestic government bond issuance in 1981.
· A national secondary market in these securities began in 1990, and government bonds have been issued via an auction system since 1996.
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