THE INTERNATIONAL DEBT CAPITAL
MARKETS HANDBOOK
2022

25th Edition

The appeal of fixed income markets
in China for foreign investors
by Akinchan Jain and Michael Bennett*, World Bank

Geopolitical issues with the United States and a recent crackdown on
consumer technology firms by the Chinese government have createdsignificant volatility in the Chinese equity markets and attracted globalattention. However, much like in the developed markets in the western
hemisphere, the debt capital markets in China are also witnessing atectonic shift. At US$17.4 trillion according to S&P and with an annualised
growth rate in the double digits since 2000, debt markets have grown inline with the robust growth of the local economy. In 2000, the Chinese
debt market was only 4.5% of the size of Japanese market andthree-quarters the size of the combined ASEAN markets. Today it is 120% of
the Japanese market and seven times larger than the ASEAN markets. Infact, the Chinese bond market now stands second only to the US in size. It
is simply too big to be ignored.

Why China?

Chinese bonds can be an attractive value proposition.
The Chinese Renminbi (CNY) offers the highest nominal

Size aside, there are several other factors that explain why

yield compared to other reserve currencies. For overseas

investors of all stripes are focusing on the fixed income

investors, yields, in many cases, are also attractive whenmarkets in China. Start with access to the onshore market.

considered on an asset swap basis.

Foreign investors can now access the onshore market
through different channels, including directly as qualified
foreign institutional investors, via the interbank market, orfrom the offshore market in Hong Kong using BondConnect. Liquidity in the onshore market has always beensignificantly deeper relative to the offshore market andwith less volatility. Thanks to easing regulations, thismarket is now available to many institutional investors.

Two key factors have driven interest in domestic Chinesebond markets from central banks and official institutions.
First, the inclusion of the CNY in the IMF’s Special Drawing
Rights (SDR) basket in 2016, created automatic demand
from central banks that had traditionally only held reservesin the US Dollar, the Euro, the Pound Sterling, and theJapanese Yen. A second important factor has been theemergence of China as a significant trading partner over

Another factor driving international interest is yields. With

the last decade for countries across the globe. These trade

the amount of global debt offering negative yields now at

relationships, combined with China’s policy of currency

more than US$16 trillion, investment opportunities inliberalisation, have made Renminbi an increasingly

CHAPTER 5 I INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK21

internationalised currency. As a result, more individuals

Language remains an issue, however. Foreign investors

and institutions around the world hold Renminbi to use for

now have the option to work with a select group ofportfolio investment

international banks that have been authorised to offer

In contrast, the motivations are a little different for asset
managers. The inclusion of the Renminbi in many of themajor indices, such as the Bloomberg Global Aggregate
Bond Index and the JP Morgan GBI-EM Index, has created anatural demand from many global bond portfolios. For
example, an estimated US$2.5 trillion in assets track theBloomberg index and China now holds a roughly 6% index
weight, implying roughly US$150bn of investment due toinclusion in that one index alone. Similarly, the inclusion of

Most international banks do not have the necessary
approvals however and instead rely on partnerships withlocal banks, a set-up that creates inefficiencies andincreased documentation requirements. Furthermore,unlike in other markets, investors cannot rely on theirglobal custody relationships and are instead required tosign direct bilateral contracts with local sub-custodians andsettlement agents.

Chinese government bonds in the FTSE World Government

Another challenge is created by the relatively short

Bond Index beginning in October 2021 will drive anmaturity profile of Chinese bonds. According to Fitch

estimated US$130bn of investment to that segment of theRatings, Chinese bonds issued during the first quarter ofmarket.

2021 had an average tenor of 3.02 years, down from 3.22

Diversification is another key factor. Given the large size,

22

custody and settlement services in the domestic market.

and the varied pool of securities now on offer from acrossdifferent ends of the credit spectrum, and with more than
6,000 issuers, local bond markets offer something to every
type of investor. Studies have also shown that the Chinese

years in 2020 and well below the average tenors seen in
the US, Japan, and Europe. For example, the average
maturity of newly issued corporate bonds during the firstquarter of 2021 was around 17 years in the US and morethan 10 years in Japan.

market has a low correlation with other major fixed income

Shorter tenors mean that refinancing risk is a frequent

markets. This low correlation has been shown against bothconcern for Chinese issuers and create rollover issues forrisk-on asset classes (e.g. major market equity and highthe market in general. For example, during the second halfyield indices) and risk-off asset classes (e.g. USof 2021, US$900bn of Chinese corporate bonds will mature,Treasuries). Chinese bonds therefore provide

30% more than in the US and 63% more than in all of

diversification benefits to foreign investors almostEurope.

irrespective of their portfolio composition.

Credit ratings are a challenge as well. Domestic credit
rating agencies have been restricted by various policies

Challenges

from assigning non-investment grade ratings, resulting in a

While the case to invest in local Chinese bond markets iscompelling, it comes with its own sets of challenges. Despite
significant changes over the last few years that have made it

system characterised by perceived “ratings inflation.” Bysome estimates, more than 80% of Chinese domestic
bonds are rated double-A or above.

easier for foreign institutional investors to participate, theWith so many securities having the same high rating,domestic market remains heavily regulated. Domestic

investors are forced to do more of their own credit analysis

reporting and settlement infrastructure, while designed withto determine relative risk and value among them. In

a view to make the process more robust, is more onerous

carrying out such analysis, investors must contend withand differs markedly from other developed markets. Many ofChinese language documentation and unfamiliar disclosure

the large domestic banks have the expertise and the desire

standards as well as the difficulty at times in decipheringto serve as agents and counter parts to help foreign

the extent of the implicit state guarantee provided to state

investors navigate these requirements.

supported issuers.

CHAPTER 5 I INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOKThe case for continued growth

purpose, we define a “sustainable bond” as a bond for

While the Chinese bond market has experienced

to sustainable development as described by theremarkable expansion over the last decade, there remains

Sustainable Development Goals adopted by the United

significant room for it to grow further. The credit market inNations.

China is still dominated by bank financing, and, as apercentage of GDP, the capitalisation of the Chinese bondmarket is small compared to the US. In fact, if the Chinesebond market were to be at the same level relative to theUnited States in terms of the share of credit provided by
securities as opposed to bank lending, the Chinese market
would be roughly double its current size.

which the use of proceeds will make a positive contribution

Motivated both by altruistic feelings and the recognition
that issues such as climate change, bio-diversity loss andinequality pose significant, long-term economic threats,investors around the world are increasingly seeking out
sustainable bonds. According to the Climate Bonds
Initiative, for example, the overall sustainable bond market(including green bonds) grew 131% in 2020 despite theMost of the future growth of the market will be driven by

impact of the pandemic (compared to an overall global

domestic investors. However, for the market to live up tobond market increase of only 16.5% for the year).

its full potential, there will need to be an increase in thenumber of foreign investors that are active in Chinese
bonds as well. Foreign investors provide additional

Looking at just non-green sustainable bonds (i.e. bondsthat impact areas other than the environment), Moody’sliquidity to a market, but that is not their only benefit.

projects that market to increase by more than 30% in 2021

Often, they also bring a focus on sound corporate

and to exceed more than US$650bn by the end of 2021.

governance that can create a virtuous circle in which theWhichever statistics are used, it is clear the sustainable

governance standards imported by some foreign investors

bond movement is a wave that shows no sign of cresting. It

attract even more investors to follow them into the market.

is also an area where we believe China has a competitive

One factor that could meaningfully increase foreign

advantage since it has already established itself in thisparticipation in the market is the potential eligibility ofarea. The Chinese market is the world leader in theChinese government bonds as collateral for cross-borderderivatives. Such use of these bonds is currently
constrained by the operational and infrastructure issues weoutlined above, as well as by legal issues related to theenforcement of close-out netting provisions in China.
However, efforts have been initiated by the InternationalSwaps and Derivatives Association and the China Central
Depository and Clearing Co., Ltd. to address thesechallenges. Given the general dearth of eligible collateral

Akinchan Jain

in Asia, if these efforts are successful, collateral eligibility
could create further and significant demand for Chinese
fixed income securities.

Michael Bennett

Akinchan Jain
Head of Asset and Liability Operations
World BankGreen and sustainable financing

email: ajain@worldbank.org
Michael Bennett

So, what additional types of developments could attractsuch increased foreign interest? For one thing, we believe

Head of Market Solutions and Structured Financethat the growth of a large and thematically diverse
sustainable bond segment of the Chinese market would
make it even more attractive to overseas money. For thisWorld Bank
email: mbennett1@worldbank.org

CHAPTER 5 I INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK

23

issuance of green bonds. In just the first quarter of 2021

Catastrophe bonds are a way to provide insurance(during which the Chinese market grew by approximately

companies, corporations, and governments with significant

US$262bn), Chinese issuers sold US$15.7bn of green

additional insurance capacity against such disasters. And,bonds, which was almost US$1bn more than was sold by all

given Asia is the largest source of global naturalU.S. issuers during the same time-period.

catastrophe losses (both in terms of human life andMost buyers of Chinese green bonds to date have been

financial costs) and China is that continent’s largest bonddomestic investors, and some foreign investors have beenmarket, it would seem to be a natural fit for China toreluctant to invest in green bonds that are aligned only

become a world leader in catastrophe bonds.

with domestic, and not international, standards. Therefore,
we cannot claim that green bonds currently are a major
driver of foreign portfolio investment. However, the sheer
issuance volumes of these bonds speak to the level of

While the challenges outlined above can appear to beattention green finance has received in China.

daunting at times, the case for an overseas investor toThe Chinese government has introduced many policies andguidelines (including a green project catalog/taxonomy)
and incentives to promote the development of the green
bond market. A similar focus on the wider area of24

Conclusion

participate in domestic bond markets in China remains
compelling. Thanks to easing regulations and a gradual
opening of the domestic market, a growing number offoreign institutional investors can now invest locally.

sustainable bonds, coupled with increased transparency

China is no longer a niche market and it is not implausiblearound use of proceeds and impact reporting in alignmentthat it will very soon be regarded as a premier investment

with international best practice, could lead to China

destination, just like the developed markets in the west.

becoming one of the world’s leading investment

China’s strong track record in green financing, and thedestinations for such bonds in the years to come.

opportunity to play a leading role in the market for

We also believe the Chinese market, given its size andgeographic location, can play an important role inpromoting a specific sub-segment of sustainable bonds,
known as catastrophe or “cat” bonds. These are bonds that
expose investors to the risk of loss of principal upon thesustainable and catastrophe bonds will only accelerate thattrend.
Notes:* The authors work in the Treasury Department of the World Bank.
Akinchan Jain is Head of Asset and Liability Operations and Michael
Bennett is Head of Market Solutions and Structured Finance.

occurrence of a specific insured event or level of insured
losses, and, in return, pay investors insurance premium

The findings, interpretations and conclusions expressed herein arethose of the authors and do not necessarily reflect the views of theenhanced coupons.

World Bank or its affiliated organisations.

Because of the dual impact of climate change andincreasing urban density on coasts and flood plains,natural disaster related losses are increasing all around theworld, but nowhere more so than in Asia. The Asian
continent experiences the largest number of natural
catastrophe events, with roughly one-third of natural
catastrophes worldwide occurring in the region. TheContact us:
World Bank

Northwest Pacific Ocean, for example, is the most active

1818 H. Street NW

area in the world for tropical cyclone activity, and much ofWashington, DC 20433, US

Asia sits along the so-called “Ring of Fire” (the origin ofweb: www.worldbank.org

90% of the world’s earthquakes).

CHAPTER 5 I INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK