Foreign Investments in the Chinese Bond Markets

Abstract

The Chinese bond market is the second largest in the world. However, studies on Chinese bond markets are very few, and especially there are no studies on foreign investments in the Chinese bond markets. This study fills the gap in the academic literature by focusing on foreign investments in the Chinese bond markets. By using the least-squares model with breaks, this study finds that although, in theory, the factors of exchange rate, yield spread, and yield correlation should play a significant role in attracting foreign investors to invest in the Chinese bond markets, the specific effects depend on the stage of the Chinese bond markets’ open-up. Initially, the main foreign investors are central banks and similar institutions, and they primarily consider more strategic factors than pure return or risk factors. As more institutional investors have entered the Chinese bond markets, the considerations of enhancing risks and/or reducing risks become more significant. The increasing foreign investments will be beneficial to the Chinese bond markets such as more issuance of longer-dated bonds, thus helping China to establish its RMB bond yield curve, and improving the market efficiency. The Chinese authorities should launch more policy initiatives to attract foreign investors.