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Could Chinese Savers Save China’s Bond Markets?

digital bond trading

  • Under the Southbound Bond Connect scheme, Chinese investors can gain access to bonds traded in Hong Kong via China’s domestic financial institutions where sales of international yuan-denominated bonds have surged as yield-starved investors seek better returns.
  • But for the legions of mainland Chinese investors, dollar-denominated debt is basically out of reach because of strict capital controls and Hong Kong is perceived as a suitable halfway house.

It’s a cliché that the Chinese are conscientious savers.

Generations of political upheaval, famine and economic ruin has ingrained into the Chinese psyche the need to save for a rainy day, a quality often compared to their U.S. counterparts whose profligacy was borne out of their privileged position in the world and knowing nothing but a life of plenty.

But that Chinese propensity to save may be just what could save China’s embattled economy from lurching into a fresh crisis, as mainland Chinese investors take advantage of the Southbound Bond Connect scheme, which launched late last year.

Under the Southbound Bond Connect scheme, Chinese investors can gain access to bonds traded in Hong Kong via China’s domestic financial institutions where sales of international yuan-denominated bonds have surged as yield-starved investors seek better returns.

Yet the revival of Hong Kong’s long stagnant Southbound Bond Connect scheme stands in sharp contrast to the bearish sentiment and lack of appetite within China’s domestic market for onshore yuan-denominated debt, which foreign investors have been dumping at a record pace thanks to high-yielding dollar-denominated debt.

Since the U.S. Federal Reserve started its policy of tightening, dollar debt demand has been soaring, helping to put a lid on U.S. Treasury yields while spreads between haven securities like U.S. government debt and those issued by American companies have been opening up.

But for the legions of mainland Chinese investors, dollar-denominated debt is basically out of reach because of strict capital controls and Hong Kong is perceived as a suitable halfway house.

It also helps that yuan-denominated debt in Hong Kong offers a yield premium versus onshore yuan debt, where easing measures are in place to combat an economic slowdown that has depressed onshore yields.

Because mainland Chinese investors just don’t have that many options, the premiums offered on yuan-denominated debt in Hong Kong provides a welcome respite, especially against a rapidly weakening yuan versus the dollar.

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