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Moody's Investors Service says that China's (Aa3 negative) ongoing liberalization of the onshore bond market will continue to shift RMB issuance and investment activity to the onshore market from the offshore market, supported by a much larger pool of liquidity and significant trading and diversification opportunities.
"Reforms in the onshore bonds market over the past year have improved disclosure and enhanced offshore investors' access to the onshore market, and we expect will lead to more international investors expanding their investments beyond central government and policy bank bonds," says Ivan Chung, a Moody's Associate Managing Director.
As of end-2016, international investors' total investments in the onshore bond market reached RMB779 billion, exceeding their RMB554 billion in investments in offshore RMB bonds.
At the same time, offshore RMB bond issuance dropped significantly to about RMB130 billion in 2016, from RMB170 billion in 2015 and almost RMB300 billion in 2014.
Moody's conclusions are contained in its just-released "Renminbi Bonds Monitor", a quarterly report that provides an update on China's onshore and offshore RMB bond markets, and Moody's view on market trends in the Mainland.
Despite its strong growth, signs of monetary tightening in China and a lingering threat of bond defaults means that the onshore bond market will face more headwinds in 2017 than in the past two years, says Moody's.
Specifically, the People's Bank of China on 3 February raised its reverse repo interest rates (7-day, 14-day and 28-day) by 10 basis points, the first such increase since 2013 for the 7-day and 14-day tenors and since 2015 for the 28-day tenors.
At the same time, it increased the lending rate of its standing lending facility -- which operates like a discount window to provide short-term liquidity to financial institutions -- a move that suggests liquidity in the onshore bond market in 2017 may be tighter than in the past two years.
Nevertheless, given the Chinese government's policy priority in maintaining economic, financial and social stability, Moody's believes it is unlikely to allow large defaults that could undermine the integrity of the onshore bond market.
