Entering China’s Bond Market – Empowering Global Fixed Income Investors

Published on November 15, 2018 by Avishek Suman

Several global investors are increasingly turning to third-party research firms like Acuity Knowledge Partners to benefit from China’s historic move to open up its bond market. Offshore analysts at the Acuity Knowledge Partners office in Beijing are helping a growing number of international investors to conduct fundamental research, confirm credit rating, translate available research and help meet relevant stakeholders - dismantling all the major barriers to China’s vast bond market.

China has been progressively opening its bond market to foreign investors, who, till recently, were restricted by complicated regulations and limited quotas. Foreign investment accounts for a meagre 2% of the country’s USD 12 trillion bond market - the third largest market in the world after the US and Japan. This, however, could change soon as China continues to make the market increasingly accessible to foreign investors. Last year, it practically ended the quota system through China-Hong Kong Bond Connect and implemented several reforms related to currency conversion and the settlement system. These measures have paved the way for the inclusion of Chinese bonds in the Bloomberg-Barclays Global Aggregate Index starting April 2019, and many other major indices are expected to follow suit.

This is good news for the yield-hungry global fixed income investors. The China’s bond market is attractive particularly due to its decent sovereign rating, higher yields, and potential diversification benefits as Chinese bonds are seemingly decoupled from their foreign counterparts.

Like all other markets, the China bond market also carries certain risks, evident from the recent default cases. Moreover, inadequate research coverage and still-evolving local credit rating agencies make it difficult for global investors to understand the market. Most international investors do not have an “on-the-ground” presence and therefore struggle to perform comprehensive in-house research. The infamous language challenge in the mainland also presents additional difficulties.

Given these challenges, global investors are increasingly partnering with China-based third-party research firms like Acuity Knowledge Partners for making investment decisions. Acuity Knowledge Partners is able to help global investors navigate through the following unique challenges in China’s bond market, helped by Acuity Knowledge Partners lineage and its long-standing presence in Beijing.

The research coverage on Chinese bond market is inadequate

Given the dearth of meaningful research on China bond market, several asset managers prefer to conduct in-house research through our analysts to gain a greater insight into this new market. Our offshore analysts perform a series of tasks related to macroeconomic, industry and company research for investors. International investors also benefit from our ability to use Mandarin sources and local databases to track news and events and present them in English. Additionally, our analysts conduct scenario analysis and stress testing to gauge the impact of certain events on investments under consideration.

The China bond market is largely unrated by global credit rating agencies

In order to arrive at a balanced and independent credit rating of potential investments, global investors are increasingly using our analysts, who apply globally established methodologies to generate unbiased ratings. Our analysts also arrive at shadow ratings of un-rated issuers to assess how they would fare on global scales.

The existing research services are mostly in Chinese language

More and more international investors are able to dodge the language barrier by using our bilingual analysts to help translate various documents from Mandarin to English. These include available research reports, financial statements, investment presentations, and policy documents that are predominantly in Chinese.

Without an on-ground presence, it is impossible to meet relevant stakeholders

Global investors know that face-to-face meetings with different stakeholders are an important part of the decision making process. Investors are able to use their Beijing-based extended teams at Acuity Knowledge Partners to set up meetings, prepare questionnaires for the meetings, help on logistics, and accompany them to these meetings as translators. Sometimes, when the investor analysts are unable to travel for meetings, our offshore analysts may even attend these meetings on their behalf.

Acuity Knowledge Partners combines in-depth capital markets expertise with strong research domain to present integrated solutions to global fixed income investors. We specialize in providing periodic updates, macroeconomic and sector analysis, opportunity evaluation, and related research services. We offer multi-language support and near-shore capabilities, with access to the best talent pool.

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