Positives on derivatives, macro policy spur inflows; stocks, bonds set to shine

China's further opening up of the derivatives market and the distinct cycle of the country's macroeconomic policy are expected to prop up global investors' accelerated allocations for renminbi-denominated assets, experts said on Nov.9.

Some 325.98 billion yuan ($50.98 billion) has flowed into China's A shares via northbound trading under stock connects between the bourses in the Chinese mainland and Hong Kong from the beginning of this year to Tuesday, close to the annual record of 351.7 billion yuan in 2019, data from market tracker Wind Info showed.

The figure marks an acceleration compared with the net inflow of 208.9 billion yuan in the whole of 2020, withstanding the test of market jitters in July and expectations of tapering by the US Federal Reserve.

Meanwhile, foreign institutional holdings in China's interbank bond market reached 3.8 trillion yuan as at the end of September, up nearly one-third from a year earlier, data compiled by UBS showed.

The robust foreign inflows attest to the growing appeal of Chinese stock and bond assets for global investors, driven by China's deepening financial opening-up, independence in the formulation of the country's macroeconomic policy, and relative advantages in economic fundamentals, experts said.

"We expect China to further open up access－in particular, to interest rate derivatives, foreign exchange derivatives and the credit derivative market, in order to enhance risk management ability of offshore bond investors," said Liu Linan, a strategist with Deutsche Bank.

Thanks to factors including freer market access, decent yields and low volatility, offshore bond investment inflows will continue and may total 800 billion yuan this year and 4 trillion yuan for the 2021-25 period, Liu said.

China has made solid headway in capital market opening-up this year, especially with regard to giving offshore investors greater access to derivatives, to facilitate their risk management of onshore allocations.

Effective Nov 1, commodity futures, commodity options and stock index options have been added as derivatives accessible to offshore investors under the qualified foreign institutional investor program, while the Hong Kong bourse has launched its first A-share derivative product in October.

More progress can be expected, as Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, said last month China's futures market will further open up and offer international investors more diversified investment choices and risk management tools.

Liu also said diversification benefits constitute another key ingredient of foreign investors' growing interest in China's bond market. "We expect China's monetary policy to be increasingly less correlated with global monetary policy."

The People's Bank of China, the central bank, launched a new structural tool to inject funds in green development on Nov.8, while the Fed said last week it will start the tapering of the COVID-related stimulus this month.

Louis Luo, investment director in multi-asset solutions with abrdn, a global investment company, said the policy divergence may continue as the PBOC may loosen its policy stance to shore up economic growth, reinforcing the appeal of China's A shares on the portfolio diversification front.

"China has played an increasingly more important role in global capital markets, and the trend will continue," said Karen Chen, managing head of China affairs and director of the Singapore Exchange, or SGX.

The SGX will continue to support China's agenda of capital market opening-up, especially in regard to bond market internationalization and offshore renminbi derivatives.

China's A-share market ended a tad－0.24 percent－higher on Tuesday as the benchmark Shanghai Composite Index closed at 3507.00 points, led by defense, chemicals, pharmaceuticals and agriculture.