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China is inviting in more retail investors to its Rmb33.5tn ($5tn) government bond market, in a bid to deepen liquidity while also boosting the sale of bonds that are fuelling a rebound in the world’s second biggest economy this year. The ministry of finance in Beijing said on Monday that it would extend the period during which individual investors can buy savings bonds from the usual 10 days to the entire month of April.
The move comes as the country seeks to give ordinary Chinese people more options for investing their savings, following a government clampdown last year on runaway growth in wealth management products. “Selling China government savings bonds to retail investors for the whole month of April will help meet retail demand for safe-haven investments,” said Liu Linan, greater China macro strategist at Deutsche Bank. The expansion of retail investment in government savings bonds is part of a greater effort by authorities to expand and diversify the market for government debt.
In March, China launched its first pilot allowing individual investors to buy local and regional government bonds, a Rmb19tn ($2.8tn) market that until this year had been restricted to institutional investors. That trial kicked off in late March and included bonds from four provinces — Zhejiang, Sichuan, Shaanxi and Shandong — and the cities of Beijing and Ningbo.
The final bond sale for the pilot was carried out last week, and early reports indicate that there was strong demand for the instruments, which can be purchased without a broker. “Allowing retail access to [regional and local government] bonds will help to diversify the investor base,” Amanda Du, an analyst at Moody’s, wrote in a report.
The largest investors in those bonds “by far” are commercial banks, which hold around 85 per cent, Ms Du wrote. She added that this contrasts with more established local government bond markets such as those in the US, Canada or Europe, where the holders are more diverse, noting that in the US, individuals are the largest holders of municipal bonds. Moody’s expects the pilot programme for retail investors to be expanded to all local government bonds by 2020.
Local government bonds have been credited with helping drive China’s economic rebound early in 2019. The leading source of growth for March was construction on infrastructure projects, driven by a rapid pick-up in the issuance of government debt in the first two months of the year. Gross local bond issuance hit Rmb782.1bn ($116.5bn) in January and February this year, up from just Rmb28.5bn for the first two months of 2018.
Ordinary investors in China have struggled to find suitable investments outside of the stock market and real estate sector. Over the past decade, wealth management products sold by banks and insurance companies have become a primary destination for retail cash. However, rising risks have forced regulators to curb the growth of that market, a move that resulted in the first slowdown in shadow banking in a decade.