Although Chinese government bonds were first issued in 1950, and secondary market trading of these bonds was introduced in the late 1980s, foreign ownership of Chinese bonds has been negligible, largely due to the lack of market access for foreign investors. This is set to change with a series of policy initiatives from the Chinese government that have the goal of opening up Chinese capital markets to international investors, liberalizing capital markets and internationalizing the renminbi (RMB). In March of 2013, Qualified Foreign Institutional Investors (QFIIs) were granted access to the interbank bond market, and RMB‐Qualified Foreign Institutional Investors (RQFIIs) were permitted to invest in fixed income products traded on the interbank bond market. Given the fact that 97% of total cash bond turnover took place in the interbank market in 2013, it is reasonable to conclude that these policy changes marked the real opening of China’s onshore bond market to foreign investors.
With the newly granted access of QFIIs and RQFIIs to the interbank bond market and the continued expansion of the RQFII quota, international investor interest in China’s onshore bonds has the potential for strong growth. In February 2014, the first Chinese bond ETF was launched in Hong Kong, providing foreign retail and institutional investors’ access to a market that was previously only available to a few select, qualified investors. ETF bond funds followed suit in the U.S. in November 2014.
In light of this development, China’s onshore bond market presents potential opportunities for foreign investors who would like to access one of the largest fixed income markets in the world. In this paper, we provide a brief overview of China’s bond market, its important characteristics, and the potential risks and benefits of investing in Chinese fixed income. We also present the detailed index methodology behind the S&P China Composite Select Bond Index, which is designed to measure the performance of China’s onshore bond market.