Macroscope | Chinese bonds’ star turn amid the market gloom should not escape foreign investors’ notice
Jason Pang says China’s bond market has proven resilient even as investor appetite weakens in the face of rate hikes and trade worries. Foreign investors who have plunged into this overwhelmingly domestically owned market appear to have made a good choice
When you’re in the midst of a hurricane, sometimes the safest place is in the eye of the storm. That’s been the case for investors in Chinese government bonds this year, as the resilience of that market stands in contrast to the majority of Asian local and dollar-denominated bonds and currencies, which have come under heavier pressure.
Facing the prospects of US rate hikes and ongoing trade war escalation, which have dented investor sentiment, returns on most Asian local currency sovereign debt have been in the red – the JP Morgan Asia Diversified Index (JADE) posted a -4.5 per cent return in US dollar terms for the first half of the year.
Chinese bonds have so far been the exception to the rule – the onshore and offshore government bonds actually notched returns of 2 per cent and 0.9 per cent respectively over the same time period in US dollar terms. Notably, the figure already includes the currency depreciation seen in the second quarter.
There are several reasons for what may seem like a counter-intuitive situation. For China’s overwhelmingly domestically owned bond market, government debt serves as a sort of safe haven. And this flight-to-quality trade may have looked increasingly alluring to domestic investors of late, given the pronounced sell-off in onshore equities and the falling renminbi.
Cooling economic growth is also giving a shine to Chinese bonds. Recently released June data confirmed that the Chinese government’s ongoing deleveraging efforts are putting the brakes on economic expansion.