Nothing comes for free, and especially in China. JPMorgan and Citi have just won coveted licences to operate in the country’s growing onshore bond market. JPMorgan will be able to underwrite bonds while Citi can settle them. Beijing may hope they can offer something in return – like the kind of endorsements that bring in stable foreign investment capital.
Foreign global banks have historically faced barriers in accessing China’s onshore market. So any new concession from Beijing is treasured.
Yet China is in search of trophies too. It would clearly benefit from having its securities added to global investment benchmarks. JP Morgan, which runs a widely used emerging market bond index tracked by $180 billion of assets, said in March it was considering adding Chinese government bonds. If this happens, global passive funds tracking the index would be automatically sucked into the Chinese bond market.
So far foreign investors have been hesitant to plunge into China’s vast 44 trillion yuan ($6.4 trillion) ocean of onshore bonds. Despite comparatively higher returns than developed markets and a quasi-state guarantee for most issuers, foreign money accounts for just around 2 percent of the total. Even last year’s overhaul of an indirect, quota-based investment system for bonds has also not led to massive inflows.
One of the reasons is China’s flip-flopping stance on opening up its capital accounts. A crackdown on outflows makes investors justifiably worried about their money being trapped inside China. Beijing officials are clued-up enough to know that a show of goodwill and openness is needed if foreign banks and investors are going to treat Chinese bonds as appetising investments. China’s announcement last year that it plans to allow foreign rating agencies into its domestic bond market was a step in the right direction.
Of course, global banks can’t and don’t take decisions about index inclusion lightly. They have clients back home to think about. But China has already weathered the humiliation of seeing its stocks rejected for three years running from a key MSCI emerging market benchmark. This new gesture of generosity looks somewhat self-serving.
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