China opening up its bond markets, but currency seen as major barrier

China's policymakers plan to open the doors wider than ever to foreign investment in the country's $3 trillion bond market, in part to help shore up the struggling yuan. But the currency is also proving to be a major barrier to the success of their plan.

Foreigners own less than 2 percent of China's $3.3 trillion in outstanding bonds and say getting their cash out of China and recent weakness of the closely controlled currency are obstacles to investment.
Foreign investors are also skeptical they can assess risk accurately when most of the $2.1 trillion in corporate bonds are rated investment grade by domestic rating agencies.

Chinese bonds offer their highest yields in two years and, on the basis of 10-year sovereign debt, the biggest interest rate gap with equivalent U.S. Treasuries in eight months, highlighting the dilemma of a market that is appealing on the one hand but on the other considered to carry too many risks.

While China's measures to clamp down on capital outflows to reduce pressure on the yuan have captured the headlines since late last year, the country has also been opening up its bond market and liberalizing its financial derivatives, aiming to draw money into the country.

Premier Li Keqiang said in March that China was considering setting up a trading link with Hong Kong this year, similar to one already used to trade stocks, which would give foreign investors much easier access to the world’s third-biggest bond market.