Yield hunters

China opens door further to yield tourists

China is opening the door further to yield tourists. The $7.5 trillion bond market in the People's Republic is already fairly accessible to large foreign players. But, a looming "bond connect" would bring in extra buyers who don't want to set up shop on the mainland. Relatively high yields will be a big lure. The downsides are corporate opacity and limited volatility.

Hong Kong's exchange operator has long talked about a fixed-income scheme to match its existing Stock Connect scheme, which links Shanghai and, soon, Shenzhen shares to the outside world. Now, Reuters says it is in exclusive, advanced talks with Tradeweb about setting up such a platform.

This marks an evolution, not revolution. Investment quotas were scrapped in February, meaning that most asset managers, apart from hedge funds, can already hold and trade Chinese bonds, provided they have a presence onshore. Foreign investment in the market has been rising steadily. But, more money should trickle in. Yields on Chinese government bonds look juicy, given that more than $13 trillion in developed-world debt is now trading at negative yields. China's 10-year government bonds yield about 2.7 per cent, for example, more than a percentage point higher than equivalent US government bonds.

There are a couple of drawbacks, however. For a start, it is very hard for active traders to make a quick yuan, because the Chinese central bank keeps volatility down.

What's more, only government bonds and those issued by rock-solid borrowers, like state development banks, look like safe bets. In contrast, the murky waters of China's $3.6 trillion corporate bond market will put off all but the bravest investors.

After more than a dozen defaults and other blowups this year, it is increasingly unclear which state-owned companies, which account for the bulk of corporate bond issuance - are backed by the government and which will be allowed to fail. There are increasing questions over the health of local government issuers, too. And, bankruptcy rules and restructuring procedures are unclear. Any tourists arriving in search of higher yields should tread carefully.