Influential financiers shift focus towards China's colossal US$25 trillion bond market, coinciding with the escalating de-dollarization trend worldwide
Foreign Investment in China's Bond Market on the Rise
Foreign investment in China's domestic bond market is on a steady upward trajectory, driven by global investors' pursuit of diversification and de-dollarization. As of mid-2025, foreign holdings of yuan-denominated Chinese bonds have surpassed $600 billion, accounting for approximately 2.3% of the $25 trillion domestic bond market.
This trend is significant for several reasons. Firstly, it represents a shift away from U.S. dollar assets as global investors seek alternatives amid rising yields in other emerging markets, U.S.-China tariff tensions, and geopolitical uncertainties. The Chinese bond market, with its lower volatility of around 2%, offers portfolio stability and relatively stable returns.
China's regulators have played a crucial role in facilitating this trend. Simplified procedures for foreign investment and the inclusion of Chinese bonds in major global bond indices since around 2019 have made it easier for foreign participation.
Moreover, foreign investment in China's bond market is not limited to government and policy bank bonds. Allocations to corporate bonds and bank-issued negotiable certificates of deposit (NCDs) are rising, reflecting growing confidence and interest in broader segments of the market.
Bond Connect, launched in July 2017, is a key channel for foreign investors to access China's onshore bond market. This offshore-based route enables more streamlined, efficient, and scalable access to RMB bond markets for international institutional investors. Bond Connect, along with CIBM Direct (which requires onshore accounts), has been instrumental in the internationalization of China’s bond and derivatives markets.
Despite a 6% dip from a peak in January 2022, the trend of increased allocations to the Chinese bond market is expected to continue. Raymond Gui, Asia head of fixed-income portfolio management at UBS's asset-management arm, predicts this trend will persist. UBS, for instance, launched its first yuan-denominated bond fund in 2018.
As of the end of May, foreign investors held $587 billion in yuan-denominated Chinese bonds. Beijing has also simplified procedures for foreign investments this year to attract more global investors. Major bond indices, such as the Bloomberg Global Aggregate Index, the JP Morgan Government Bond Index, and the FTSE Russell World Government Bond Index, began incorporating Chinese bonds into their global benchmarks around 2019.
In summary, the current trend in foreign investment in China's bond market is characterized by growing allocations driven by the global trend of de-dollarization, increased market accessibility, and regulatory facilitation. Bond Connect plays a pivotal role in this process by providing a convenient offshore gateway, enhancing investment flows, and contributing to the significance of China's bond market as the world's second-largest fixed income market.
Investors are increasingly allocating their funds to China's bond market, driven by the global trend of de-dollarization and a search for diversification opportunities. UBS, for instance, launched a yuan-denominated bond fund in 2018, reflecting this growing interest.
The Chinese bond market, with its lower volatility and stable returns, is becoming an attractive investment avenue for global financiers seeking alternatives amid rising yields in other emerging markets and geopolitical uncertainties.
