A flurry of initiatives by China to open up its currency, stock and bond markets inside and outside the country has failed so far to allay international investor concerns about performance, accessibility and liquidity.
China has been working increasingly rapidly to liberalise its capital markets, with an aim to make its currency fully convertible, giving it a larger role in the global economy.
As its markets open up, they can offer a similar appeal to investors to those enjoyed by many frontier markets — an appreciating currency over the longer term and potentially high returns for those willing to take an early punt.
Launched just four years ago, the overseas yuan bond market — or “dim sum market” — has already reached $120 billion, for example.
But the market has centered heavily around Hong Kong, though countries such as Britain have made a concerted push to grab a share of this potentially lucrative market. “The development of a significant secondary market for renminbi (RMB) bonds has yet to happen,” a recent survey commissioned by the City of London said.
“There have been major issuances in London ... but the secondary market, after a flurry of activity in 2011 and 2012, has practically ceased,” the report added, recommending more discussion between Britain and China on how to boost the market.
Recent developments include the appointment of China Construction Bank (601939.SS) as a yuan clearing bank in London, designed to aid liquidity in this market, the introduction of yuan/sterling trading and plans for yuan/won trade in Asia.
China has also expanded its quota system to enable international investors to buy China's onshore yuan, stock and bond markets. Outstanding quotas approached $100 billion last month. And a Hong Kong-Shanghai stock investment program, due to be introduced later this year, will allow stock trading between the two cities, opening up access to China for international investors with a Hong Kong presence. China should be able to make the most of the worldwide hunt for yield, and its dim sum bond market has had a bumper first half.
Total new issuance—- mainly but not exclusively from Chinese borrowers — of 358.6 billion yuan ($57.7 billion) this year is already close to the 2013 full-year total, according to Thomson Reuters data. International investors don’t need a quota to invest in this market, unlike the onshore market. “It’s a good easy first step for foreign investors,” said Gregory Suen, investment director with HSBC Asset Management in Hong Kong.
Research by David Spegel, head of emerging markets sovereign and credit strategy at BNP Paribas, showed dim sum made up the bulk of this year’s international emerging market debt issuance denominated in local currency.