Abstract
The Chinese bond market is the second largest in the world. However, studies on Chinese bond markets are very few, and especially there are no studies on foreign investments in the Chinese bond markets. This study fills the gap in the academic literature by focusing on foreign investments in the Chinese bond markets. By using the least-squares model with breaks, this study finds that although, in theory, the factors of exchange rate, yield spread, and yield correlation should play a significant role in attracting foreign investors to invest in the Chinese bond markets, the specific effects depend on the stage of the Chinese bond markets’ open-up. Initially, the main foreign investors are central banks and similar institutions, and they primarily consider more strategic factors than pure return or risk factors. As more institutional investors have entered the Chinese bond markets, the considerations of enhancing risks and/or reducing risks become more significant. The increasing foreign investments will be beneficial to the Chinese bond markets such as more issuance of longer-dated bonds, thus helping China to establish its RMB bond yield curve, and improving the market efficiency. The Chinese authorities should launch more policy initiatives to attract foreign investors.
Highlights
Since the launch of the game-changing (QIC, 2018) Bond Connect program on 3 July 2017, foreign investors have been continuously increasing their investments in the Chinese bond markets
The main reason why foreign investors have doubled their investments in the Chinese bond markets within just 16 months after the Bond Connect program, that is, during June 2017–October 2018, is the drop of yield spread, which represents the hike of Chinese bond price, and drop of yield correlation, which shows the positive incentive of diversification effects
After the Bond Connect program was launched in July 2017 and the following inclusion into international bond indices, the Chinese bond markets have significantly changed
Summary
Since the launch of the game-changing (QIC, 2018) Bond Connect program on 3 July 2017, foreign investors have been continuously increasing their investments in the Chinese bond markets. The outstanding balance of the Chinese bond markets is RMB 84.4 trillion (equivalent to US$ 12.3 trillion) as of December 7, 2018, having recently surpassed Japan’s and just second to the United States’.2. A few studies have been focused on Chinese government bond markets such as the local government debt issues (Ang et al, 2015): the government bond market microstructure (Bai et al, 2013), government bond market efficiency (Liu, 2017), and government bond yield curves (Loechel et al, 2016). There are no studies on foreign investments in the Chinese bond markets. This study fills the gap in the academic literature by focusing on the issue of foreign investments in the Chinese bond markets
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