November 9, 2016 / 12:01 AM / 2 years ago

Repatriation, tax laws more crucial than growth for China bond investors-survey

HONG KONG, Nov 9 (Reuters) - Ease of moving funds, clear ownership rules, and clarity around tax laws are investors’ top concerns when it comes to China’s onshore bond markets, a survey showed on Wednesday.

These factors outweighed worries over economic growth and property prices, the survey of more than 100 institutional investors who oversee an aggregate $21 trillion in assets found.

The survey was done by a group of seven financial industry associations around the world, led by the Asia Securities Industry & Financial Markets Association (ASIFMA).

It collected responses from investors on subjects ranging from legal and operational issues such as repatriation of funds to macroeconomic issues like GDP growth and the value of China’s yuan or renminbi (RMB) currency.

Out of a total of 32 factors, 26 scored 2.5 and below, 1 being the most important and 5 least important.

“The survey shows that all factors are important, so China will not be able to only fix the top concerns and then everything will be fine,” Mark Austen, Hong Kong-based CEO of ASIFMA, told Reuters.

“There are a lot of things they still need to do if they want to attract substantial foreign investment into the bond market.”

In February Beijing allowed a wider variety of foreign investors into its interbank bond market and relaxed foreign exchange repatriation rules in May.

“Fixed income investors are primarily concerned with clear and stable government policies on financial markets and the value of the RMB (yuan) - as that can substantially erode profits for fixed-income investments,” the survey noted.

Although global financial markets have waxed and waned in recent months with uncertainty over China’s economy, fixed income investors were unperturbed.

“Macro-economic concerns such as GDP growth are relatively less important than capital market development concerns, credit information concerns or legal and operational concerns,” it said.

Among capital market development issues, respondents were most concerned about bond trading liquidity and the cross-border flow of capital.

Just over 51 percent of respondents had already invested in China’s onshore bond markets, with 33 percent planning to invest in the next 12 months and 63 percent intending to raise their exposure over the next year.

Inclusion in global bond indices was a more important capital development factor for non-Asian respondents, while availability of hedging tools was a key issue for European participants.

U.S. respondents considered corporate governance as one of the most important capital market development factors.

The survey found investors believed that the availabity of credit information to offshore investors was the most important credit information concern, while differentiation between issuers made by the domestic rating scale was least important.

This was perhaps because “international investors do not rely on domestic ratings”, it said.

This domestic rating factor is already reflected in the market. Since onshore bond market reforms in mid-2016, the yield gap between the AAA-rated 5-year corporate bond benchmark and the comparable AA-rated had dropped to 40 basis points from over 70.

Since China’s opening of its $7.5 trillion domestic bond market earlier this year, there has been a surge in global interest.

Foreign investors raised their holdings of Chinese debt by 50.7 billion yuan ($7.60 billion) last month to 726.4 billion yuan, the largest increase in more than two years, with investors looking to the potential inclusion of these bonds in global indexes by 2017.

The global investors in the survey represented 36 percent of the top 50 investors in the United States, a fifth of the top 100 in Europe, and 27 percent of the top 100 in Asia. Asset managers accounting for two thirds of the overall mix.

The assets controlled by the respondents varied significantly: Twenty-seven percent had assets under management in excess of $500 billion and 32 percent manage $100-$500 billion. At the other end of the spectrum, those controlling less than $10 billion accounted for 23 percent of respondents. (Reporting by Umesh Desai; Editing by Eric Meijer)

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