Asia Fixed Income: From Implicit Guarantees to Bond Defaults

Chinese authorities will allow market participants to buy onshore bonds through transactions carried out in Hong Kong, which will further broaden foreign access to China’s onshore bond market. While no additional details have been provided, a “bond connect” scheme that provides cross-border cash bond trading is anticipated by market participants.

Despite currency volatilities, China bonds offer better yields and diversification benefits. However, foreign investors are concerned with the potential credit risk.  Besides the non-parallel rating systems between local and the international standards, the implicit government guarantees prevented bond defaults, which had made it difficult to analyze the true underlying credit risk.

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