A backdrop of low global interest rates and ESG issues makes China’s fixed income market appealing for global investors.
“The gradual index inclusion of Chinese government bonds in international indices and the continued demand from foreign investors will help further support China bond markets, which are well-developed relative to most other emerging markets,” said Angus Hui, head of Asian and emerging markets credit at Schroders.
The China onshore RMB-denominated bond market is now the second largest in the world after the US. Its offshore US dollar-denominated bond market, meanwhile, accounts for more than half of the total market share in Asia fixed income.
And in today’s historic low rate environment, the additional income and carry benefit available could prove even more valuable for investors.
Investors should also note the low correlation of Chinese bonds with other asset classes, in turn creating gains via diversification, added Hui.
Slow but healthy
Potentially tempering investor excitement, a slowdown in GDP growth is expected in China, from the 18% recorded in the first quarter of 2021.
Yet even at 5% per year over the next decade, it will be faster than other markets in the world. Plus, it should still present opportunities for active investors.
“Productivity growth will be key in achieving that. Building up the high technology sector should help,” said David Rees, economist at Schroders. “This could boost the overall income level of the country and its income per capita over the long term.”
Moreover, China’s economic and monetary policy cycles will not be perfectly synchronised with other parts of the world; instead, they will be influenced by conditions within the domestic economy.
“That ought to lead to lower correlations between Chinese bonds and other markets,” added Hui.
Emerging options
Chinese corporate bonds also boast attractive yields and wider spreads with lower duration risks than other global credit markets. “The investment grade market has delivered relatively steady performance over the last five years,” added Hui.
There are also some multinational corporations financing their capital requirements via the RMB-denominated bond markets; these are expected to offer additional benefits and diversification for investors.
Green bonds are another area investors may want to pay attention to, said Hui, given they are aligned with the country’s sustainable development goals.
“We expect more Chinese green bond issuances to occur in both the onshore and offshore space, especially now that standards have elevated much closer to international levels,” he explained.
For example, green coal projects are no longer considered as green bonds in China. “We expect more companies from the renewable and alternative energy sectors, as well as new economy and tech companies, to issues green bonds going forward,” Hui said.
In all cases, however, the key when assessing fixed income opportunities in China is to have a forward-looking view on individual names.
In the real estate sector, for example, investors should look at factors such as their landbank, execution capabilities, access to other borrowing channels and balance sheet quality, Hui noted.
