Rising foreign investment in China's onshore stocks and bonds shows accelerating financial integration

Nicholas R. Lardy (PIIE) and Tianlei Huang (PIIE)

Rising foreign investment in China’s onshore stocks and bonds shows accelerating financial integration


China's integration into global financial markets is accelerating. Cross-border portfolio capital flows into China have been rising since 2014. Foreign ownership of onshore (excluding Hong Kong) Chinese stocks and bonds reached RMB5.7 trillion ($837 billion) at the end of September 2020, a nearly eightfold increase from January 2014 levels.

Several factors have contributed to the rapid increase in foreign holdings of onshore renminbi-denominated Chinese securities. Chinese stock and bond markets have grown rapidly since 2014 and have become too big for global investors to ignore. The number of channels that facilitate foreign portfolio investment has also grown. In July 2017, China launched the Bond Connect program, letting foreign investors access the China Interbank Bond Market. The inclusion of Chinese securities in global stock and bond indices, like the Bloomberg Barclays index, drew institutional investing.

There are signs that China's integration in global financial markets will continue to deepen. Interest rates on Chinese government bonds are higher than the US interest rate, and a rate cut is unlikely. Foreign investors can therefore earn higher returns on Chinese bonds, and an appreciating renminbi means they can convert their earnings at a more favorable rate. China's rapid economic recovery from the COVID-19 pandemic reflects the profitability of Chinese industry, which is driving its strong equity market performance.

This PIIE Chart was adapted Nicholas R. Lardy and Tianlei Huang's Policy Brief, "China's Financial Opening Accelerates."

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