Market participants long anticipating the launch of southbound Bond Connect may have felt a little deflated when the programme was finally announced. Initial quotas for Chinese investors to buy offshore bonds have been set at a very modest US$78bn annually, and US$3.1bn daily.
Nevertheless, China’s approach to capital markets internationalisation has always been gradual. The quotas will be raised over time, and longer-term opportunities will arise from the programme.
Some US$33trn of Chinese private wealth is held in low-yielding bank deposits, far exceeding investment in domestic stock and bond markets. Given the country’s rapidly aging demographic profile, Chinese policymakers need to raise savers’ allocations to higher-return assets to reduce the government’s future social welfare burden. China’s own markets are not yet deep enough to absorb so much capital, so the eventual scale of Chinese portfolio investment in global bond markets could be very sizable.
* First published in IFR Asia (24 September 2021)
Photo by Chester Ho on Unsplash
