China's opening push to draw major bond investors into its gigantic onshore bond market has shown that US and European asset managers are still at least 18 months to two years away from engaging in earnest.
The decision in February to remove quotas and other restrictions on portfolio investment into the $7 trillion market, followed moves last year that did likewise for foreign central banks.
But despite yields of 3 percent or more which should draw fund managers dealing with negative returns in Europe, only 2 percent of China's onshore bond market is in foreign hands, compared to 30 percent in some Asian markets.
The hesitancy, visible at events run by banks in London since, is part about practical barriers, part nerves around China's financial outlook and part its absence from bond indices that govern half of such portfolio investment.
"If you look around this room, I'm sure everyone more or less would say the same thing: that it will just take some time for them to work out how they going to do it," David Scilly, head of debt and currency trading with First State Investments told Reuters at a Bank of China seminar. "I'd say it is a question of up to two years before we get there. Its just one of so many things that people have on their plates at the moment. And you need to work out the relationships and the practicalities."
Previous schemes aimed at drawing capital onshore in China have seen limited take-up, with some lenders handing back $800 million in unused quotas last year.
Some commentators in Asia cast the opening of the bond market as quid pro quo for the yuan's admission to the International Monetary Fund's basket of reserve currencies last November - suggesting it is largely symbolic for now.
"We really haven't seen as much portfolio flow as expected," admits Spencer Lake, vice chairman for global banking and markets at HSBC. "It is still complicated. You still have to register with the PBOC (central bank), it's a different language, the documentation is not within the same construct, and so on."
Lake contrasts that with the Hong Kong-Shanghai Stock Connect which allowed investors "frictionlessly" to buy Chinese stocks through a single, established channel.
Bonds are sold over-the-counter rather than on exchanges, meaning investors will buy directly from one of 20-odd market-making banks who stock government bonds and the quasi-government debt issued by China's four "policy banks".
That means setting up new channels for how trades flow, or how one deals with the currency risk and hedging that tend to go along with investing in a local currency bond market.
There is talk of creating bond "connects" which might allow money to flow more easily, for example, from European trading platforms or futures markets. But for the moment there is little clarity on what markets that might occur on.
"Even though the way is now open, it is not seamless," says Lake. "If big fixed income indexes approve China for inclusion without these pipes being cleaned, it may create more rather then less logistical issues."
After a scare over devaluation of the yuan, and talk of structural problems with debt, China is also not investment flavour of the month.
Flows from Hong Kong into Shanghai via the stock connect have reached just 42 percent of the total allowed quota, itself a tiny percentage of the market's roughly $3.5 trillion cap.
"We have heard the noise from the banks promoting this trade," said Francois Savary from Geneva-based Prime Partners, which manages $2.6 billion of assets.
"For the moment there is still the question of what is going to happen with China's banking system. You have the potential for the currency to weaken and that is not something we want to play with."
Savary says China should close up its capital account, not open it further, to allow restructuring of the debts racked up by state companies. Then foreign money would feel more comfortable with the risk.
Several senior sales people who are pushing China to funds in London say that the key trigger for greater investment in the onshore bond market will be its addition to the indices run by J. P Morgan, Citi and Barclays.
J. P Morgan's is the smallest but also the most widely used on emerging debt. It put China on its watchlist for inclusion in March and several bankers Reuters spoke to expected Beijing's onshore debt to be added by the end of the year.
A minimum three-month holding period for investors and monthly withdrawal limits are stumbling blocks but HSBC's Candy Ho lays out a timeline of around 6-9 months for the indexes to assess the issue once barriers are removed, followed by another year for index-tracking funds to adjust allocations.
"Three or four years ago China was a brand new shiny toy that the average (western) investor did not understand. It was hard to feel it or touch it," HSBC's Lake says.
"Now its still very new but it is maybe not as shiny. Its on a journey to become almost everyday business.
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