“A lot of people are just focusing on the A-share market, but for me, what will have a much quicker structural impact is foreign investments into the onshore bond market,” he told FSA.
“Big allocators of international money, such as sovereign funds, pension funds and insurance companies, they are all fixed income-focused. And the only market big enough to absorb a meaningful allocation is China’s bond market,” he said.
China is now the third largest bond market globally. Onshore, the size is $7.3trn and another $115bn is offshore in the form of dim sum bonds (denominated in CNH) and $250bn in US dollars.
Last month, the State Administration of Foreign Exchange announced details on expanding overseas investor access to China’s interbank bond market (CIBM), which accounts for 91.5% of onshore bonds. UK-based Insight Investment became the first overseas financial institution to access the CIBM.
But to trigger significant capital inflows, global benchmarks need to include onshore bonds. "It's the same argument as the MSCI inclusion of A-shares,” he said.
Building China products
BNP IP manages an onshore bond portfolio through HFT Investment Management, its mainland joint venture with Haitong Securities set up in 2003. The firm is also using the RQFII quota to invest in the CIBM, Cheng said.
The firm intends to expand its business and increase the product offering in the mainland over the next five years, he said.
Apart from the joint venture, the firm currently has an advisory wholly foreign owned enterprise (WFOE) in the Shanghai Free Trade Zone. It was set up in April 2014, and focuses on basic operations such as client servicing.
“The cost of being late to the China market is much higher than being a little bit too early," Cheng said. "The value of learning from mistakes, the relationships you build, the talents you hire, and the branding we believe will translate into a successful experience.”
The firm is preparing to apply for the Qualified Domestic Limited Partner (QDLP) quota, which would enable BNP IP to sell offshore products to onshore high net worth or institutional investors.
So far, 15 firms, including some hedge funds and asset managers such as UBS, Oaktree Capital and Value Partners, have been granted the QDLP license.
Cheng said that his firm is not in a hurry because HFT already has a QDII quota.
“We want to make sure we are fully prepared for the QDLP to deal with the registration, distributors and custodians. The WFOE we have today is not ready for that yet.”