Research On The Effect Of Foreign Investors On China’s Local Currency Bond Yields

Attracting high-quality foreign institutional investors to the bond market is one of the key points for China to promote the opening of the bond market and build a market-oriented and open financial market system.The entry of foreign investors into China’s bond market not only implies a large inflow of cross-border capital,but their investment and trading behavior also has a profound effect on the bond market.The increased participation of foreign investors not only implies an increase in bond demand and a diversified investor base structure,but also pushes up the liquidity of RMB bonds to a certain extent,thus systematically depressing RMB bond yields.However,the degree of internationalization of China’s bond market is still low,and the risk concerns brought by the influx of foreign capital cannot be ignored.International capital with a tendency to profit may flow in and out of the bond market significantly due to market conditions and other factors,causing sharp fluctuations in RMB bond yields and thus affecting the stability of the bond market and the financial market as a whole.The report of the 20th Party Congress proposes to promote a high level of opening up to the outside world and steadily expand the opening up of rules,regulations,management,standards and other institutional types.Given the current share of foreign investors in the Chinese bond market and the degree of openness of the Chinese bond market itself,what impact has the introduction of foreign investors had on the level and volatility of bond market yields? Apart from international and domestic macroeconomic fundamentals,can the sentiment of foreign investors,which is the focus of behavioural finance,also affect RMB bond yields? How effective has the bond market reform and development been so far? These are a series of questions that need to be considered.Based on this,this paper first examines the impact of foreign investors on the level and volatility of government bond and policy bank bond yields in the Chinese bond market from the asset price perspective and risk perspective.Based on the data of foreign investors’ bond holdings from June 2014 to June 2022,a feasible generalized least squares(FGLS)method is used to explore the impact of changes in the proportion of foreign investors’ positions on bond yield levels;second,the traditional GARCH model is extended to a T-GARCH model using the major events of China’s bond market opening as time points to explore the impact of foreign The paper then explores the impact of changes in the participation of foreign investors on the volatility of two types of bond market yields from the perspective of market depth.Subsequently,this paper selects Chinese and international(US)investor sentiment proxies from the perspective of market depth and uses behavioral finance as the theoretical basis to construct an investor sentiment index using a composite of principal component analysis to investigate whether different investor sentiment indicators have significant effects on Chinese bond market yields,and tests the differences in the effects of different sentiment states through an asymmetric effect model,and finally uses a mediating effect model to explore.Finally,the mediating effect model is used to explore the influence mechanism.The results of the study show that the introduction of foreign investors has reduced the yield level of government bonds and policy financial bonds to different degrees,while the U.S.Treasury yields and the RMB exchange rate have a significant impact on the yield level of the Chinese bond market,indicating that the yield level of the Chinese bond market has been influenced by global economic factors and the openness of the bond market has been improved.In terms of the opening history,the participation of foreign investors intensified the volatility of current bond yields in the early stage of the opening of the bond market,but with the widening of the opening channels,the yield volatility was suppressed and there was a significant asymmetric effect in the financial bond market;International bond market investor sentiment has a significant negative impact on China’s government bond yields through contagion of Chinese bond market investor sentiment,and the impact of international bond market investor sentiment on China’s government bond yields is asymmetrical,i.e.the impact of elevated sentiment is greater.The policy implication of this paper is that to promote the high-level opening of the bond market,it is necessary to grasp the leading power of opening the bond market,promote the internationalization of the bond market by the "gravitational" factor,and promote the process of institutional opening of the RMB bond market;at the same time,it is necessary to optimize the risk management system of the bond market,review it in a timely manner based on the effectiveness of the policy and the actual operation of the market,and make good arrangements for At the same time,we should optimize the risk management system of the bond market,review the effectiveness of the policy and the actual operation of the market,and make arrangements for optimal operation.Finally,as the opening up of the bond market progresses,it is necessary to strengthen policy communication and coordination with overseas market regulators,improve the prudence of overseas investors’ access,adopt a macroeconomic policy of camera choice,and stabilize investors’ sentiment.