China’s Bonds Losing Luster as Investors Anticipate Monetary Tightening
Global investors are decreasing their ownership of Chinese government bonds, which have been a reliable source of returns during the pandemic, as they anticipate monetary tightening in China and look for more attractive investment opportunities in the rebounding economy. China’s bond market was unique in 2022 as global central banks raised rates rapidly to combat inflation, while China faced a rapid slowdown due to the COVID-19 pandemic. But now, as the economy recovers quickly, experts predict that the People’s Bank of China will eventually withdraw stimulus.
Another reason for the decrease in interest in China’s bonds, which offer about a 3% yield on 10-year investments, is the possibility of greater capital gains in other markets as developed market rates reach their peak. Data from China’s Bond Connect platform, the main avenue for foreign investment in mainland markets, shows that foreigners sold roughly 616 billion yuan ($90.63 billion) worth of bonds in 2022, bringing their holdings down to 3.4 trillion yuan. This trend has continued into this year, according to fund managers.
“If investors want to invest in China’s recovery, the answer is not Chinese government bonds (CGBs),” said Jason Pang, portfolio manager of the China Bond Opportunities Fund at J.P Morgan Asset Management. “The answer to participating in riskier bond opportunities would be Chinese offshore credit and long renminbi.” He believes that investors who have already invested in mainland markets might shift their focus to equities.
Pang has partially reduced his CGB exposure and reallocated a significant portion of it into offshore yuan (CNH) dim sum bonds in Hong Kong. As global investors invest in China’s recovery through stocks in Hong Kong, he believes that the improvement in cash conditions in the city will support those bonds.
In contrast to the global trend of tightening, China has been easing monetary policy for the past two years, which has contributed to the outperformance of its bond market compared to others. The FTSE Xinhua Chinese Government Bond Index returned 3.2% in 2022 in local currency terms and declined 5.4% in dollar terms, while the FTSE World Government Bond Index declined 18.3% in dollar terms.
Jerome Broustra, head of investment specialists, fixed income, and multi-asset solutions at AXA Investment Managers, shares this view and is overweight in Indonesian sovereign bonds and infrastructure-related offshore China high-yield bonds.