Foreign institutional investors are likely to hold 10 percent of bonds outstanding on China's bond market in five years, predicted Liu Linan, a senior strategist of Deutsche Bank in a report Friday.
Liu made the forecast after Chinese central bank recently simplified procedures for foreign investors to trade a basket of products including cash bonds, bond repos, bond forwards, bond lending, interest rate swap, and forward rate agreement on interbank market. As he thought, the move pointed to China's explicit determination to ram through financial reform, opening-up of capital market and free convertibility of the Chinese currency - yuan.
In the future, inflow of capital from foreign institutional investors will mean long-term demand for onshore RMB bonds, especially sovereign bonds and quasi-sovereign bonds, according to Liu. In the following 3-5 years, related foreign institutional investors may hold five percent of bonds in onshore market, indicating about three trillion yuan capital influx, which is well likely to be digested by China's bond markets.
To satisfy the expectable huge demand, China is supposed to vigorously develop its bond market, via further diversifying bond products including mortgage or assets backed securities, municipal bonds, money market tools, and enterprise bonds to boost liquidity of cash and derivatives. However, these do not mean rising fiscal deficit and China can achieve the goal by replacing indirect financing with direct financing and maintaining an 8-10 percent annual growth of direct financing, the report shows.
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