The market’s immediate focus is on today’s FOMC meeting and Dutch
elections. However, China’s annual legislative session (National
People’s Congress) ended earlier today,
and Premier Li unveiled a new initiative. Late this year, China will
allow overseas funds to buy onshore bonds in Hong Kong.
Details on the mechanics, including implementation timeframe, were not
immediately available, but the general thrust is consistent with other measures
to boost market accessibility and encourage inflows. The State
Administration of Foreign Exchange (SAFE) announced at the end of last month that
foreign institutions that invest in interbank debt market could trade a range of financial products,
including forwards, swaps, and options mainland counterparties.
The Shanghai and Shenzhen links to Hong Kong allow accounts in the
Special Administrative Region to have access to mainland shares.
Trying to convince MSCI to include mainland shares in the emerging market
indices, China eased access (to the A shares). However, increasing access
to the mainland bond market is also important, and arguably, increasingly so
now that the yuan is part of the SDR. Both Hong Kong and China are
developing a bond trading platform.
When the yuan was trending higher and capital inflows, Chinese officials
liberalized outflows. Now, in a different part of the cycle, China is seeking to liberalize
inflows. It is working with the market to guide it. Foreign
investment in China’s onshore bond market estimated around $100 bln. Some
bond market indices, which are used by some asset managers as a benchmark, have
recently begun including onshore bonds. According to Moody’s sovereign
bonds and policy, bank bonds account
together for about 37% of the China’s $9.5 trillion interbank bond
market. The rating agency expects the inclusion of China’s onshore bonds
in the benchmark indices will encourage additional passive inflows.
In addition to the opening up of the onshore bonds market, China is
arguably on the verge of another important step. China is often criticized by some high income
countries for violations of intellectual property rights. We have
argued that this is more a function of the level of development than moral
shortcomings. In the 19th century, for example, a rising developing
country and revisionist power, the United States often treated European intellectual
property rights in a similar fashion. As China developed its own portfolio of patents and intellectual
property, we anticipate China to be more respectful of others’ intellectual
property.
The World Intellectual Property Organization (UN) reported that China’s
international patent applications rose 45% last year. By the end of
the decade, China can surpass the US and
Japan to be the largest user of the international patent system. Two
Chinese companies topped the 2016 league table for international patent
applications: Zte (telecoms) and Huawei (electronics). The US
Qualcomm was in the third place, and Japan’s Mitsubishi Electric was in fourth place. Asia accounted for
nearly half of the international patent applications in 2016 and the US and Europe
almost evenly divided the other half.
This weekend, while the G20 are
meeting in Germany, US Secretary of State Tillerson is expected to meet China
President Xi and Premier Li. The meeting should pave the path that will lead
to the first summit between Trump and Xi
in early April. As we have noted, Trump
has walked back from some of the more antagonizing rhetoric, like the threat to
abandon the one China policy or to cite China as a currency manipulator. While there are several Trump Administration
officials and advisers that are particularly antagonistic to China. However,
as we have noted, there are others who accept the general framework the
global liberal world order the US has helped facilitate. Chinese officials, being politically savvy, are likely to encourage the latter. Although some of Trump’s supporters may not
like it, don’t be surprised if China is not cited as a manipulator in next month’s Treasury report.