Xi Jinping Effect
After the Korea-China summit, investors are showing high interest in Chinese bonds. Yields on Chinese bonds are higher than Korean bonds and the cost of investment such as commissions and other charges has become lower as direct investment is allowed.
Products that hedge exchange risks would be sold to individual investors early next year.
According to the investment banking sector on July 8, 80 billion yuan (US$12.9 billion) of the Renminbi Qualified Foreign Institutional Investor (RQFII) limit has been assigned to Korea, which was decided during the summit.
This is equivalent to 13 trillion won of RQFII limit, and means that Korean institutional investors could directly invest in the Chinese bond market. Since investment in the Chinese bond market so far was done through other RQFII countries such as Hong Kong, it was not quite attractive due to commissions and other investment costs.
Kim Jin-woo, a researcher at Shinhan Investment Corporation, said, “The most attractive feature of Chinese bonds is the difference in yields (compared to Korean bonds). This invites lots of investors in this low-yield market."
The difference in yields of 3-year Korean treasury bonds and Chinese ones were indeed 125bp (1bp=0.01 percent point) on July 4, which is extremely tempting to institutional as well as individual investors. The difference in yields of Korean and Chinese corporate bonds is more than 200bp.
Considering that international credit rating company Moody’s gives an Aa3 rating to both Korea and China, the yield differences are significant. Chinese bonds are even more attractive than savings accounts in Chinese yuan, which have been very popular with the additional yields of 40-80bp relative to savings accounts in commercial banks.
It will take some time, though, to actually launch products directly investing in Chinese bonds. Researcher Kim Jin-woo explained, “In order for direct investment in Chinese bonds to get started officially, we need to enter the inter-bank bond market, which needs to be separately approved by the People’s Bank of China.”
Products that provide fixed yields in Korean won after hedging exchange risks would be the most positive types, if products directly investing in Chinese bonds actually come into market. These products will be most likely to be introduced early next year when the RQFII limit is extended and a direct transaction system is set up. Securities companies also need to select qualified gilts.