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Moody's Investors Service says that the launch of the Bond Connect program in July 2017 and simplification of cross-market bond issuance procedures is the primary reason for increasing investments by international investors in China's onshore bond market and also offshore USD issuance by Chinese issuers this year.
"These increasing cross-market activities have also accelerated the rapidly diminishing role of the offshore RMB bond market in connecting onshore and offshore market participants," says Ivan Chung, a Moody's Associate Managing Director.
"In the first nine months of 2017, new issuance in the offshore RMB bond market continued its declining trend, falling to RMB27 billion, which is only 21% of the annual issuance for 2016, thereby reducing supply of offshore RMB bonds to international investors," says Chung.
"On the other hand, according to China Central Depositary and Clearing Company, in the first three quarters of 2017, foreign investors' holdings of onshore RMB bonds increased by RMB117 billion to almost RMB900 billion," says Chung.
Moody's conclusions are contained in its just-released "Renminbi Bonds Monitor" which looks at the latest developments in the renminbi bond market, as well as in the Chinese economy more generally.
While exchange rate volatility will affect cross-market investment and issuance in the short term, we believe growth for these activities is solid. Given China's policy objectives to internationalize its capital market and currency, easing access to the onshore and offshore markets is unlikely to reverse.
This means international investors will continue to increase their holdings in RMB-denominated bonds because the bonds only account for a small share of global investment portfolios and sovereign reserves.
At the same time, Chinese issuers will gradually turn the offshore USD bond market from an alternative funding channel to a regular channel as they pursue diversification of funding channels, penetrate into international businesses and investments, and participate in "Belt and Road" projects.
