Regulatory Hurdles Affecting Chinese and Indian Bond Markets

The final stop of my whirlwind global bond tour is Asia. The challenge is trying to talk about the entirety of the Asian bond market in 700 words or less given that the economic conditions, bond markets and investment opportunities vary widely across the region. To tackle this challenge, I will split the countries into three groups.

When people think about emerging investment opportunities in Asia, China and India tend to come up first. These two economies are likely to become increasingly important as the Chinese and Indian economies continue to expand, which could present many future opportunities for investors. However, the challenge is that today these bond markets are very difficult to access for foreign investors. Limitations on who can invest in local bonds, restrictions on how money is allowed to flow into and out of these countries, and the small overall size of these bond markets make investing there tricky. For comparison purposes, the U.S. bond market is over $19 trillion in size, as opposed to just $282 billion for China and for an Indian market that has not yet developed enough to be included in the Barclays indexes (source: Barclays Multiverse Index as of 7/29/16). Because of these reasons, neither country is included in most major global bond indexes. There may be fixed income opportunities in these markets down the road, but for now they are very limited.

China’s bond (EMB)(LEMB) market remained small and undeveloped compared with the bond markets in developed countries (AGG)(IEF). As of June 2016, the Chinese bond market comprised only around 75% of GDP compared to over 200% in the US market, which is the major source of credit for corporate borrowers. Around 80% of the credit in China comes from  banks while the remainder comes from the bond market.

Data from the People’s Bank of China shows that foreign investors buying Chinese bonds have picked up 15% to $115 billion this year. The surge in bond buying came mainly after regulators lifted some restrictions on foreign holdings. Despite the increase, Bank of America Merrill Lynch data shows that this total is still a mere 1.3% of the total market. Foreign investors are still wary of investing in the country’s bond market, citing multiple regulations, ambiguity over the rules and their implementation, and the risk of policy reversing.

The Indian (PCY) bond market is also small, and issues like foreign investment restrictions are holding it back. The size of the Indian bond market is around $900 billion with a heavy dominance of government bonds. But recently, regulators tried to expand foreign participation in the market with certain investor-friendly measures. There’s a proposal to allow foreign investors direct access to bond trading platforms for government and corporate debt. We need to see how well these changes attract foreign investors.