Foreign Ownership of Sovereign Debt and Bond Market
Integration: The Case of China
This paper examines how foreign ownership of local currency sovereign debt impacts the yield co-movement between domestic and global bond markets. Using China’s 2017 bond market liberalization as a case study, I present new evidence showing that increased foreign participation in
a country’s sovereign debt enhances the co-movement of its long-term yields with those of global markets. Following the policy change, foreign ownership of local-currency Chinese government bonds nearly doubled as global bond investors shifted investments from developed markets to
China. This shift significantly strengthened the co-movement between long-term yields of Chinese government bonds and those of developed markets, particularly the G7 countries, with an increase of 70%.