Research On The Impact Of Foreign Investors On China's Bond Market

China bond market has been the second largest bond market in the world after several years' development.The outstanding volume is 97.1 trillion RMB as of the end of 2019.Meanwhile,China is opening up its bond market.The outstanding bond volume hold by foreign participants reached 2.27 trillion RMB as of the end of 2019,seizing 2.34% of total outstanding volume.As one of direct financing channels,bond market plays a key role in interest rates liberalization and alternative financing.The openness of China bond market stands as a key part in the openness of the whole financial market.Hence,the impact of foreign participation of China bond market deserves further research.First,this paper investigates the macro background of foreign participation of China bond market.We did some research on the role of bond market in the whole finance system,the progress of foreign participation of bond market,and the impact of foreign participation(including the impact on domestic bond market,the internationalization of RMB,and domestic stock market and foreign exchange market).Second,we investigate driving factors behind the foreign participation of China bond market.Interest rate spread factor and diversification benefit factor are main reasons why foreign participants hold China local currency bond market.In terms of exchange rate risk,data analysis shows that there is no significant evidence showing RMB exchange rate fluctuation affects the investment of China local currency bond from foreign participants' point of view.We found that the exchange rate risk hedged portfolio demonstrated higher sharp ratio and return by constructing two virtual portfolios.Third,we investigated the micro behaviors of foreign participants that could affect China local currency bond market.foreign participants tend to hold treasuries and NCDs;they hold extremely limited share of credit bonds.The reasons are information asymmetry and inadequate investor protection;they do not trade actively,but the investor-type distribution is more diversified.Forth,we analyzed the qualitative and quantitative effects of foreign participation on the yield,yield volatility and liquidity of China bond market.We found that the foreign participation can lower the yield significantly;but the impact on yield volatility and market liquidity is neutral.Last,since the advantages of foreign participation overweight the disadvantages,we propose some suggestions for promoting foreign participation of China bond market.They are: the construction of a universal regulatory and settlement system for bond market;enforcement of investor protection system;the development of bond-related derivative market;the development of off-shore RMB bond market;the relationship of interest rate market and exchange rate market.