Drivers of portfolio flows into Chinese debt securities amidst China’s bond market development
McCully, Tuuli (05.12.2023)
Numero
8/2023Julkaisija
Bank of Finland
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe20231205151484Tiivistelmä
The paper focuses on China’s onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Building on a theoretical model of push and pull factors as a foundation for the empirical analysis on drivers of bond flows into China, static and time-varying models are estimated to explain the importance of various push and pull factors in the context of China’s bond market development. While China-specific pull factors, such as domestic economic growth prospects and asset returns, are important drivers of bond flows, the results reveal that global push factors, such as US interest rates and investor risk aversion, have recently gained significance as drivers of flows into China. This shift goes hand in hand with China’s gradual bond market liberalization measures. The findings confirm China’s continued bond market deepening and integra-tion with the rest of the world.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
The paper focuses on China’s onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Even with its relative isolation and a small foreign investor base, China’s onshore bond market is already the second largest in the world. It continues to develop and open up gradually, despite concerns about de-globalization and persistent tensions between China and many advanced economies. It is therefore important to understand the key factors impacting capital flows in and out of China.
CONTRIBUTION
The research contributes to the literature on capital flows by providing a China-focused study on the drivers of bond flows. Using a comprehensive approach to studying bond flow drivers, we derive a simple small open economy model to highlight the advantages of the push-pull framework to be used. This model serves as a theoretical foundation for the empirical analysis. In addition to estimating static drivers, we allow for time-varying coefficients for both push and pull factors. The model uses unique monthly data on net non-resident portfolio investment into Chinese debt securities provided by the Institute of International Finance. The paper also complements the existing literature with a review of the main characteristics of China’s onshore bond market, key liberalization steps, and bond market developments, as well as identification of recent trends in debt portfolio inflows into China by non-resident investors.
FINDINGS
While China-specific pull factors such as domestic economic growth prospects and asset returns remain the important drivers of net non-resident purchases of Chinese debt securities, global push factors such as changes in US interest rates and international investor risk aversion have recently gained significance as drivers of portfolio investment flows. This shift goes hand in hand with China’s gradual bond market liberalization measures. The findings confirm the Chinese bond market’s ongoing deepening and integration with the rest of the world.
FOCUS
The paper focuses on China’s onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. Even with its relative isolation and a small foreign investor base, China’s onshore bond market is already the second largest in the world. It continues to develop and open up gradually, despite concerns about de-globalization and persistent tensions between China and many advanced economies. It is therefore important to understand the key factors impacting capital flows in and out of China.
CONTRIBUTION
The research contributes to the literature on capital flows by providing a China-focused study on the drivers of bond flows. Using a comprehensive approach to studying bond flow drivers, we derive a simple small open economy model to highlight the advantages of the push-pull framework to be used. This model serves as a theoretical foundation for the empirical analysis. In addition to estimating static drivers, we allow for time-varying coefficients for both push and pull factors. The model uses unique monthly data on net non-resident portfolio investment into Chinese debt securities provided by the Institute of International Finance. The paper also complements the existing literature with a review of the main characteristics of China’s onshore bond market, key liberalization steps, and bond market developments, as well as identification of recent trends in debt portfolio inflows into China by non-resident investors.
FINDINGS
While China-specific pull factors such as domestic economic growth prospects and asset returns remain the important drivers of net non-resident purchases of Chinese debt securities, global push factors such as changes in US interest rates and international investor risk aversion have recently gained significance as drivers of portfolio investment flows. This shift goes hand in hand with China’s gradual bond market liberalization measures. The findings confirm the Chinese bond market’s ongoing deepening and integration with the rest of the world.