HEAD-TO-HEAD: China Merchants versus Penghua

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Niki Wu, Morningstar

Introduction

Fixed income asset classes generally underperformed equities in the first half of this year, and even after interest rate volatility declined in the second quarter and bond yields stabilised, fixed income returns have lagged overall. The main exception was the China onshore bond market, now the second largest in the world after the US.

“We believe that amid a higher inflation regime and the current subdued level of expected returns for liquid asset classes, there is a case for investors to look to Asian bonds as a substitute for global bonds. Renminbi onshore bonds offer higher yields and exhibit lower correlations to equity markets,” said Elizabeth Allen, head of Asian fixed income, HSBC Asset Management, at a media briefing last month.

Renminbi onshore bonds are attractive, according to Allen, with ten-year government bonds currently trading at a substantial yield premium versus other comparable global bonds. Likewise, she believes that Asia credit benefits from higher spreads and lower duration versus other global credit markets while still enjoying low default rates. In today’s low interest rate environment, the extra income and carry benefit available could prove even more valuable for investors.

Moreover, the gradual index inclusion of Chinese government bonds in international indices will further support China onshore bond markets, according to Angus Hui, head of Asian and emerging markets credit at Schroders.

While concerns grow about the slowing momentum in economic recovery, fixed income investors should look to allocate to China government bonds.

“The asset class is enjoying significant inflows, which are set to accelerate as authorities allow foreign investors greater access to the market and as Chinese debt becomes a bigger feature of global bond indices,” notes Luca Paolini, chief strategist at Pictet Asset Management.

This is a compelling opportunity in a world where yields are already ultra-low – and often negative, he said. “Attractively-priced bonds are in short supply.”

So, while asset managers highlight the appeal of China fixed income, Niki Wu, senior manager, research analyst at Morningstar (Shenzhen) compares two China-domiciled onshore fixed income products: the CMF (China Merchants Fund) Industrial Bond A Fund and the Penghua Industrial Bond Fund.

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