The fast growth and development of China's bond market is consistent with its government's ongoing efforts to allow easier access for foreign investors. As regulators and policymakers open up China's capital accounts, the investor base grows; this, in turn,
China has been opening up its bond markets to foreigners, encouraging more onshore companies to issue bonds and providing a wider selection of credits
means more onshore corporations are encouraged to issue bonds, which provides investors with a wider selection of credit issues.
Not all of these bonds are without problems, of course, but even though the number of defaults has increased since 2014, the government has managed to contain systemic risks. In fact, defaults can be seen as a welcome part of China's bond-market development, since they help improve capital allocations and reduce moral hazard over the long term. Nevertheless, we would still like to see China implement a proper and proven default-resolution process to allow the restructuring of stressed credits, rather than rely on liquidity injections.
Another important development in China's fixed-income marketplace is the fact that China has become the third-largest issuer of green bonds—an area that we expect will continue to grow given China's many critical environmental projects.
As foreign access to the onshore bond market opens up, China's inclusion in global bond indexes becomes increasingly more viable, particularly in global emerging-market debt indexes. This should further boost the demand for China's bonds, particularly for investors seeking more attractive yield potential and diversification opportunities.