Foreign investment in China’s bond market has steadily increased, but international exposure to local government bonds (LGBs) remains limited. Despite accounting for 28% of China’s bond market by value, LGBs make up less than 1% of foreign holdings, as concerns around credit risk, liquidity and transparency continue to deter investors.
LSEG recently delved into the potential investment opportunities in China’s local government bonds.
While non-residents have shown greater confidence in Chinese government bonds (CGBs) and policy bank bonds—often seen as more liquid and safer options—LGBs have struggled to gain comparable traction. As of January 2025, offshore holdings were concentrated in CGBs and policy bank bonds, which together account for the vast majority of international inflows into the Chinese fixed income market.
This discrepancy stems largely from the perception that LGBs carry higher credit risk and offer lower liquidity than their sovereign or policy-backed counterparts. Unlike these instruments, LGBs have traditionally lacked standard benchmarks, making them harder for institutional investors to evaluate or integrate into portfolios.
LGBs are distinct from riskier urban investment bonds issued by local government financing vehicles (LGFVs). While both may have some level of local authority support, only LGBs represent official liabilities recorded in national and local budgets and overseen by the central government.
The Chinese government has taken steps to improve investor confidence in LGBs, notably through the ‘Hidden Debt Swap Program’. This initiative, which began in 2024, will see RMB 800bn in new local government special bonds issued over five years, with RMB 4tn earmarked to replace off-budget hidden debt held by LGFVs. Additionally, RMB 6tn in local government debt has been approved for restructuring to bring liabilities under a more transparent fiscal framework, LSEG explained.
Alongside these reforms, LGB issuance is rising rapidly. In 2024 alone, the total volume reached RMB 9.8tn, up from RMB 7.4tn in 2022. This increasing supply has also helped stimulate secondary market trading, gradually addressing previous concerns around liquidity. The LGB market’s total outstanding value now surpasses that of CGBs, underlining its growing importance in China’s financial landscape.
In response to investor demand for structured benchmarks, FTSE Russell and the Bank of China have launched the FTSE BOC China Local Government Bond Index Series. This initiative provides comprehensive coverage of the LGB market and introduces a reliable set of reference points for fund managers and ETF providers.
Overall, the launch of this index series and ongoing regulatory efforts signal a shift in the perception of LGBs as an investable asset class. With improving transparency, attractive yield profiles, and a deepening secondary market, LGBs are gaining traction as a viable fixed income option for global investors.
Read the full story here.
Keep up with all the latest FinTech news here
Copyright © 2025 FinTech Global
Investors
The following investor(s) were tagged in this article.
