Skip directly to Accessibility Notice
VanEck logo

VanEck Videos

Seasoned investment professionals, sector-dedicated analysts, and creative thinkers are at the heart of our business. Get their perspective on today's market climate.

Emerging Markets Bonds

Video Transcript

Chinese Bond Market Overview


FRAN RODILOSSO: China's domestic bond market is actually the third largest domestic bond market in the world. At more than 11 trillion U.S. dollar equivalent, Chinese bonds are larger than all other countries other than the U.S. and Japan. Interestingly, China's not included in many indexes yet, nor is it in many foreign investors' portfolios, but there's a very deep and liquid market for onshore bonds in China. Of that 11 plus trillion dollar equivalent of local currency bonds onshore in China, roughly four and a half trillion, are made up in equal parts of government and quasi-sovereign bonds. Quasi-sovereign bonds are bonds issued by three of China's development banks.


The other roughly 7 trillion in debt is made up of non-government financials, nonfinancial corporates, local government financing vehicles, local government debt issued straight by local governments, asset backed securities, it's a very diversified market.

Underrepresentation in Major Indices


RODILOSSO: For global bond portfolios or international portfolios for U.S. investors, many of those are built around referencing an index. And indexes have only in 2019, begun adding Chinese bonds to their investible universes. The main reason for that lack of index inclusion, lack of a presence in global portfolios, was access.


Actually for a number of years in, international investors have been able to access Chinese bonds, onshore bonds, but on a limited basis, through a quota system that required regulatory approval for the investor, that had quota limitation on the amount that could come in, but also holding periods and restrictions on how money could leave. Only in 2016, did the Chinese government start opening the domestic bond market for direct access outside of the quota system for international investors. That was initially largely institutional sovereign wealth funds, very large banks.

In 2017 China introduced the bond connect system, making it easier for financial firms globally to come in through Hong Kong. Much like the stock connect system functions, it gives foreign investors a little more flexibility with how they trade the foreign exchange with multiple counterparties.


So in short, the bonds are slowly entering indexes in 2019 and 2020. As that happens though, they'll remain underrepresented. Chinese bonds will probably cap out at around 6% of popular global aggregate indexes, and somewhere between seven and 10% of sovereign emerging market bond debt indexes, local currency ones.

Constructing a Portfolio with Chinese Onshore Bonds


RODILOSSO: Investors who approach onshore bonds, Chinese onshore bonds, from a portfolio construction perspective, should consider the fact, again, that this is a very deep, very large market. They should consider that it's going to remain for some time underrepresented relative to its size in any indexes they might track.


However, they should also consider that as the third largest bond market among the top dozen or so bond markets in the world, China has some of the higher yields. Most of the large bond markets in the world, outside the U.S., are extremely lower negative yielding countries. China's currency is likely to become increasingly tradable, perhaps a reserve currency over time. So while investors should have increasing ability to take advantage of investment and trading opportunities, and have hopefully, a liquid market to go in and out of, they should keep in mind that it'll probably be represented in indexes. And they might want to consider standalone allocations within their global bond portfolio. For a U.S. investor in international bond allocation, they might want to look at doing standalone allocations to China, not just through a broad indexes, where it will be underrepresented.

- - - - - - - - - -


Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) may offer investments products that invest in the asset class and countries discussed in this video.

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any discussion of specific securities mentioned in the video is neither an offer to sell nor a solicitation to buy these securities. 

All investing is subject to risk, including the possible loss of the money you invest.  As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.  Diversification does not ensure a profit or protect against a loss in a declining market.  Past performance is no guarantee of future results.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Associates Corporation. © Van Eck Associates Corporation

Van Eck Associates Corporation, Distributor
666 Third Avenue, New York, NY 10017