The opening-up of the Chinese financial market is reflected by the overseas investors swarming into the Chinese bond market.
According to the latest statistics from China Central Depositary and Clearing, the amount of Chinese bonds held by overseas institutional investors reached 1.65 trillion yuan ($240 billion) by the end of June, hitting a record high.
Overseas institutions' investment in Chinese bonds increased by 34.6 billion yuan in June, which was the seventh month in a row that these institutions have increased the Chinese bond allocation in their portfolio.
Data from China Foreign Exchange Trade System (CFETS) showed that a total of 108 overseas institutional investors from 47 countries and regions had entered China's interbank bond market by the end of June.
Besides, up to 1,038 institutional investors had joined the bond connect program by the end of June, which was double the number registered during the same period last year. The bond connect program between the Chinese mainland and Hong Kong markets was launched in early June 2017.
The lucrative Chinese bond market when compared to the other parts of the world makes the former extremely attractive to overseas investors. Public information showed that the yields on 10-year US treasury notes came at 2.04 percent on July 5 while that of 10-year China treasury bonds was registered at 3.17 percent on the same day.
The long-term yields of the treasury bonds in the eurozone and Japan have even dropped below zero, according to China International Capital Corp (CICC). By the end of June, the global amount of the bonds with negative yields has amounted to $12.5 trillion, outnumbering the size registered in 2016 and hitting another record high.
As the fixed-income research team of CICC predicted, there is high possibility for the global interest rate to hit another historic low. Global capital has been withdrawing from risk assets and flowing into the bond market. In this sense, the Chinese bond market which promises higher yields is more attractive to investors.
Even when the renminbi fluctuated earlier this year, overseas investors increased their investment in Chinese bonds. This has indicated that overseas investors have much faith in the renminbi and the long-term prospects of Chinese economy, wrote the CICC analysts in a note.
The Bloomberg Barclays Global Aggregate Index started including China's yuan-denominated bonds on April 1. Analysts believe that the other major global bond indices, the FTSE World Government Bond and the JPMorgan Government Bond Index-Emerging Markets, will follow suit in the near future.
Mark Leung, chief executive officer of JPMorgan in China, said that importance of the yuan-denominated bonds has been underrated in the global major indices given the size of China's economy. The number of reform policies that Chinese central regulators have introduced over the past few years, including the opening-up of the onshore interbank market and the bond connect program, will help to attract the attention of the global indices.
Up to $300 billion of capital will be flow into the Chinese market if all the three major indices include yuan-denominated bonds, JPMorgan estimated.