Evolving opportunities in China’s fixed income market

Asia’s economic growth continues to reshape the global investment landscape, now accounting for nearly 40% of global GDP. China stands out as a central driver, both for its scale and its pace of ongoing financial reform. In the first quarter of 2025, China’s GDP grew by 5.4% year-on-year, surpassing its own targets and outpacing most major economies. High-tech manufacturing has been a major contributor, with notable double-digit growth in areas like electric vehicles, 3D printing, and robotics. Retail sales and domestic consumption remain resilient, reflecting the government’s shift towards a consumption-driven growth model. 

China’s economic strengths such as resilience, innovation, and improving economic structure are now complemented by a clear focus on unlocking domestic consumption and fostering emerging industries such as green tech, digital economy, and healthcare. However, challenges remain: demand-side weakness persists, deflationary pressures are a concern, and the property sector is still under strain. Despite these headwinds, Chinese authorities continue to pursue targeted reforms to strengthen the country’s long-term economic trajectory. 

China’s bond market: Global opportunity, real reform

Held in Singapore in June 2025, our Invest in Asia Series: Spotlight on China event focused on the theme of the continued opening and maturation of China’s bond market, now the world’s second largest. Reforms have delivered deeper interest rate liberalization, more robust price discovery, and expanded access for global investors through initiatives like Bond Connect and Swap Connect. The market now offers international participants a level of transparency, efficiency, and liquidity that stands up well in comparison with both developed and emerging market peers. 

Speakers highlighted the following 

• Stability and low correlation: Chinese government bonds have shown robust stability, with low correlation to both U.S. Treasuries and other major bond markets making them attractive for diversification in global portfolios.

• Liquidity and access: Trading volumes and turnover have grown rapidly since the launch of Bond Connect in 2017. Liquidity in government and policy bank bonds is strong, and mechanisms for repatriation and hedging (such as Swap Connect) are in place, though some instruments remain restricted for foreign investors.

• Product choices: For institutional investors, the market offers choices ranging from government bonds (CGBs) to policy bank bonds and local government debt. Most recent foreign inflows have targeted short-duration products such as negotiable certificates of deposit (NCDs), but there is steady growth in interest for longer-term bonds and more complex fixed income strategies.

• Ongoing reforms: There is ongoing regulatory engagement to address remaining friction, particularly around access schemes, taxation, repo market connectivity, and the hoped-for opening of CGB futures to a broader group of foreign investors. 

Market outlook and practical takeaways 

Economic outlook 

While China’s near-term growth remains solid by global standards, there are realistic headwinds. Export growth has been front-loaded and is expected to moderate; domestic consumption still has significant untapped potential, but policy stimulus will be required to unlock it. Property sector weakness and local government debt are not resolved. That said, China’s global contribution to GDP growth is set to remain substantial, with innovation, technology, and services expected to play an expanding role. 

Bond market strategy 

• Diversification and risk management: China’s bond market offers a clear diversification benefit due to its low correlation with other global markets and overall stability, even amid global volatility.

• Liquidity and execution: For investors focused on size and scale, the main tenors of government and policy bank bonds are highly liquid and increasingly accessible through international platforms.

• Access and hedging tools: Bond Connect, Swap Connect, and related initiatives are steadily making entry and risk management more practical, though further progress on futures and tax clarity would be welcomed by international players.

• Policy and infrastructure evolution: Regulatory authorities and market infrastructure providers are responsive to investor feedback, with a clear pipeline of enhancements in settlement, trading hours, and derivative instruments. 

Conclusion 

The opportunity set in China’s fixed income market is real, growing, and increasingly accessible to international capital. The market is not without its challenges such as macroeconomic risks, policy uncertainty, and technical frictions persist but the trajectory of reform and development is clear. For institutional investors seeking diversification, scale, and long-term exposure to Asia’s growth, China’s bond market now warrants serious consideration. 

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