Chia, who manages the China Onshore Bond Fund, said the offshore bond market has remained relatively stable given the limited supply.
However, this quarter could be more volatile than the first one for both onshore and offshore bonds, she said.
“The credit problem has become a liquidity problem. There is a lot of leverage placed in the credit space. Some investors dumped the good stuff such as government bonds after facing a cash call,” she said.
Moreover, there is pressure for mainland credit rating agencies to review current onshore bond grades, which might also prompt some international agencies to re-look at the companies that have cross-border bond issuances, she said.
For dim sum bonds, or offshore market bonds denominated in yuan, those companies which rely on their onshore parent companies to get funding might be affected, Chia said.
“The momentum of a whole downgrade event could continue in the second half of this year.”
Portfolio adjustments
To address volatility, since late 2015 Chia said she has trimmed credit risk by extending the average duration a bit longer, and cutting the holdings of onshore investment grade.
Holdings of policy bank and government bonds, both on and offshore, were increased to 30% from the earlier level at about 20%. The fund does not invest in onshore high yields.
She said the percentage could go higher, but the current level is enough for defense.
Chia expected there will be no more “shocking defaults”, after a spike in China corporate bond defaults this year. The China bond market should stabilise, in terms of default risks and yield level, after a volatile first-half of the year.
“I think we need to see some stability in the credit space before the [Chinese yuan’s Special Drawing Rights] entry in October as the credit side also has a impact on the currency.”
The biggest risk would be that fiscal stimulus runs out of steam, leading to an economic nose dive, Chia said. However, she said regulators are working to stop the credit bubble from growing.
Chia said she has also been collecting non-Chinese issuers’ dim sum bonds since last year after many investors fled due to concerns over yuan depreciation.
She also started to look at securities firms in the offshore market which are likely to benefit from China’s continual market opening.
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Among the seven funds that invest in China bonds, Nikko’s product had a 6.54% return. But it underperformed the CSOP China 5-Year Treasury Bond ETF in the three-year period.
