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Wednesday, June 13, 2018, 14:00
Goldman says US investors warming to China bond market
By Bloomberg
Wednesday, June 13, 2018, 14:00 By Bloomberg

In this July 3, 2017 photo, Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor, front second right, witnesses as Chief Executive of Hong Kong Monetary Authority Norman Chan, left, and People's Bank of China Deputy Governor Pan Gongsheng ring the opening bell at the launch ceremony of the Bond Connect at Exchange Square in Hong Kong. Goldman Sachs Group Inc says US institutions are encouraged by the Bond Connect and China’s inclusion in Bloomberg Barclays, JPMorgan Chase & Co and Citigroup Inc indexes. (ROY LIU / CHINA DAILY)

US investor interest in China’s bonds has seen a “notable improvement” as the market is being steadily opened up to foreigners, according to Goldman Sachs Group Inc.

Inclusion in global bond and indexes such as Bloomberg Barclays, JPMorgan Chase & Co and Citigroup Inc is expected to increase the importance of the Chinese fixed-income market to foreign investors 

The launch of Bond Connect in July last year, coupled with China’s inclusion in the Bloomberg Barclays Global Aggregate Index from April next year, has served to pique their interest over the last 12 months, Goldman analysts Danny Suwanapruti and Andrew Tilton wrote in a note Wednesday, following a visit to meet US institutional investors.

“The feedback during last week’s trip is that, although it could still be a few years away before China is included into all three major global bond indices; most investors agree it really is just a matter of time,” they said. 

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“Several investors that we spoke with are in the process of setting up accounts and have shown significantly increased levels of interest in China’s bond market.”

Inclusion in global bond indexes such as Bloomberg Barclays, JPMorgan Chase & Co and Citigroup Inc is expected to increase the importance of the Chinese fixed-income market to foreign investors. 

Goldman expects the market to almost double in size within the next four years and sees foreigners owning around 22 percent of all Chinese government bonds by the end of 2022, equivalent to about US$900 billion.

While investors appeared more eager to get a foothold in the nascent market, there were concerns about whether its prominence could drain liquidity from other emerging markets, in particular as it may come at a time key global central banks are becoming less accommodative, according to the strategists.

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“Given the notion that core yields are moving higher and China’s fixed income markets are emerging as a new asset class compounded some investor concerns over the potential pull out of EM local currency fixed income markets over the coming years,” Suwanapruti and Tilton said.

Meanwhile, US investors expected the Chinese yuan to drift sideways in the near term as authorities don’t want the currency to strengthen much further, nor do they favor a sharp depreciation that may be “mistakenly construed as retaliation on trade wars,” the analysts wrote.

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