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Persistently lacklustre economic growth and geopolitical tensions continue to fuel discussions on the advantages and challenges of investing in China. Amidst these debates, however, one asset class has emerged as the beneficiary of the country’s weak macroeconomic conditions: China onshore bonds.
The interest rate gap between the US and China is expected to narrow, potentially attracting more capital inflow to China’s fixed-income market, particularly government bonds, which are regarded as having very low credit risk.
According to Schroders, foreign investors consistently increased their holdings in Chinese government bonds (CGBs) from September 2023 to January 2024.
This trend reflects the return of international bond investors to China’s onshore bond market. “The inflow of funds and expectations of looser monetary policy have created an opportunity for investors to enter the market,” says Swa Wu, Investment Director, Fixed Income, at Schroders in Hong Kong.
Nikkei Asia, citing investment experts from M&G and PineBridge Investments, noted that these inflows into China’s onshore bond market were strategic, driven by expectations of declining interest rates in the country.
“CGBs, along with other high-grade, government-related debt in the country’s onshore market, stand to benefit from an economic slowdown, monetary easing, and weak inflation that teeters on the brink of price declines,” highlights Lei Zhu, Head of Asian Fixed Income at Fidelity International.
Both, Wu and Zhu, expect the People’s Bank of China to maintain a relatively accommodative monetary policy stance in the near term.
“Against this backdrop, top-rated Chinese onshore bonds are likely to outperform most risk assets in the country, as their stable cashflows become more attractive amid feeble inflation and growth,” says Zhu.
Schroder’s Wu advises to take caution when selecting high-yield Chinese bonds.
“With China’s economy currently in a different cycle than other markets, high-rated Chinese government and policy bank bonds can offer risk diversification benefits. On the other hand, year-to-date returns indicate that Chinese high-yield bonds and corporate bonds have underperformed, including bonds issued by certain Chinese banks or asset managers with non-performing assets, or those still exposed to the troubled real estate sector,” Wu says.
