Another example of the tremendous growth that China has experienced in recent years is its capital market, particularly the domestic bond market. In 2019, with an outstanding of USD 13.34 trillion, it has surpassed the Japanese market to become the second largest in the world (the largest is still the US market, almost 3x the Chinese market). In the last 7 years, the average growth rate has been 26% per year, thanks mainly to standards implemented in 2015 so that the Chinese provinces accessed this market instead of financing almost exclusively with banks.

These bonds are traded in two markets, the most relevant being the interbank (“CIBM”) that represents 90% of the volume issued and where almost 800 banks registered to operate in China access.

Although China recognizes the importance of a stable financial market, it has taken a position of progressive and structured liberalization to open its bond market to foreign participation as a key element of the financial reform agenda, giving investors more alternatives and also reducing the systemic risk of its banking sector, where local governments and public investment vehicles (LGFVs) relied on bank loans to finance infrastructure projects that, while allowing sustained economic growth, were sometimes unable to repay its debts.

It is in this context that different international issuers have been accessing this market through the so-called Panda Bonds, issued in renminbi and used to finance activities both inside and outside China. Although most of the registered issuers are corporate, many are foreign subsidiaries of Chinese companies. Of the rest, the largest number of issuers is concentrated in sovereigns with investment grade, or large European or Asian global banks.

The most important investors are the large Chinese state banks with decisive influence on demand and the issuance price. International investors have also been attracted by interesting returns. The launch in 2017 of Bond Connect, an interconnection between the different depository agents of mainland China and Hong Kong, has simplified access for foreign investors and this trend is expected to continue.

China continues to increase its global influence, so more foreign issuers and investors will want to participate in this market. The Chinese government should continue working to make the task easier, simplifying approval processes and giving certainty within the framework of current capital control.

From the Chilean perspective, the Central Bank already has invested 8% of its global portfolio in renminbi, through the purchase in the CIBM of China Treasury Nominal Bonds. It is a matter of the private sector following.

Alberto Yastremiz

Deputy General Manager

China Construction Bank Chile