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Access to the interbank bond market is the latest opening up of the Chinese onshore FX market to foreign bond investors completes the list of tools that foreign investors need to facilitate their investment in the onshore China interbank bond market (CIBM). The CIBM is already open to most foreign investors, following the PBoC notice 2016-3 issued in February 2016.
Access to onshore FX hedging instruments meaningfully increases foreign investors’ incentive to consider investing in onshore CNY bonds against the current backdrop (i.e. with onshore hedging costs meaningfully lower than those via the offshore CNH market).
Still, asset swap trades (using onshore FX swap or CNY CCS) into CGBs (China Government Bonds) are not particularly appealing at current levels. Foreign investors may not opt for a high hedging ratio as yet.
To put things into perspective, 1Y CNH CCS stands at around 4.0% (mid-point), 1Y onshore CNY CCS (not liquid) at 3.2%, and 1Y CNY FX swap implied rate at 3.3%.
These compare with the 1Y onshore CGB yield at 2.9%. A position at 1Y onshore CGB with FX hedged via onshore CNY FX swap still implies LIBOR minus a spread return, but an enhancement compared with hedging via offshore CNH instruments.
