Victor Shih
Victor Shih

While the central government is eager to get foreign investors into its bond markets, they should care very careful in doing to, says Victor Shih, assistant professor political science, UC San Diego and leading author on the relation between political and financial factions in China, in Bloomberg.


Apart from (the lack of) reforms, there’s the issue of credibility. A wide scale government intervention into the nation’s stock markets after a $5 trillion rout this year spooked foreign investors. Measures taken included a ban on large shareholders from selling and a crackdown on short sellers — a reminder of the role still played by the state.

“Foreign investors in the Chinese bond market should remain cautious,” said Victor Shih, author of the book “Factions and Finance in China: Elite Conflict and Inflation.” “The authorities will need to clearly signal to foreign creditors that their rights are equal to those of domestic creditors either by decree or through precedents.”

The central government in Beijing already plays a leading role in the domestic bond market. For example, a multi-trillion yuan initiative launched by the government this year to swap high-yielding local debt into cheaper municipal bonds includes inducements for state banks to buy the new, longer-maturity, lower yielding bonds.

“The Chinese government is still very reluctant to allow the market to operate on its own,” said Shih.

Overseas issuers account for only 0.04 percent of onshore government and corporate bonds and foreign investors hold only 1.8 percent of the market, according to data compiled by Bloomberg.

More in Bloomberg.

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