2022 Investment Views: Chinese bonds

Courage and confidence

What will China’s bold new approach mean for investors?

Nov 24, 2021

3 minutes

Wilfred Wee
What will China’s bold new approach mean for investors?

The fast view

  • China’s property bond market turmoil has been relatively contained to the high-yield segment, and its government bonds are likely to continue to benefit from the stable domestic growth and inflation outlook.
  • Various recent policy moves all boil down to a theme of courage and confidence, as China seeks to forge a sustainable and inclusive growth path.
  • We expect to see more policies aligning with this goal of equitable growth in 2022, together with rising private investment and a continued focus on economic self-reliance. Unclear communication around policy is the most significant risk we see.
  • China’s onshore bonds should continue to prove compelling for investors, not least given their diversification properties. With China’s recent index inclusion, the mainstreaming of China’s bond market will also continue.
QWhat is your take on recent turmoil in China’s property sector?

Headlines and associated corporate bond market volatility relating to China’s real estate sector really reflect the continuation of a theme that began in early 2021 – a more proactive regulatory stance. The underlying driver of this, which started with internet platforms before moving to the private tutoring sector and property market, is the desire by China to forge a sustainable and inclusive growth path.

Given this, we expect deleveraging to take place in the real estate sector, with property companies becoming somewhat more like utilities. So far, the biggest market moves have taken place in high-yield property names – BB or B rated bonds – and we think large cap firms in the sector are likely to be the net winners.

More broadly, property market turmoil has been relatively contained, with investment-grade corporate bonds in China relatively unaffected and government bonds reasonably well anchored, thanks to the benign outlook of stable domestic growth and contained headline inflation.

QHow should investors make sense of China’s recent policy moves?

Over the past year we have witnessed some notable policy moves from China: conventional and effective monetary policymaking in reaction to the global pandemic; deleveraging of the financial sector to reduce the risk of over-heating; efforts to tackle carbon emissions via production curbs on the heaviest emitters; and action to tackle privacy concerns in the technology sector.

Each of these reflects a combination of courage and confidence among China’s policymakers as the country seeks to forge a sustainable path for its economy and population.

QWhat policy developments do you expect in 2022?

We expect the theme of courage and confidence to continue. This is likely to manifest itself in a variety of measures to ensure improved equality comes hand-in-hand with economic progress. We also expect an ongoing focus on self-reliance from an economic perspective, with the promotion of domestic service sectors.

Furthermore, we see the role of the private sector continuing to grow in China, with private investment picking up and flow of foreign investment into the country remaining fairly strong.

China’s authorities are likely to continue to support small and medium-sized enterprises, technology innovation and green economy industries. Tightening policy measures concerning the real estate and high-energy consumption sectors have been broad-based and firm, and are likely to remain in place, possibly with the intention of directing lending to the sectors that align with the government’s longer-term agenda of economic transformation.

QWhere do you see the biggest risks and opportunities?

One of the risks relates to the communication of further policy changes or regulation – we have seen this year how negative the market reaction can be to imprecision around this. Hopefully lessons will have been learned to allow for a smoother path towards China’s economic and social goals.

The US$20 trillion onshore CNY bond market1 should continue to be really interesting for investors because it is so diversifying and so different from other assets. China is, after all, the largest official creditor in the world and its bond market behaves a lot more like a developed market and not your typical emerging market. More specifically, recent volatility among high-yield onshore bonds has created some attractively valued bottom-up opportunities for the discerning investor.

We expect China’s US$800 billion offshore US dollar bond market2 to fare well relative to its global investment-grade peers during 2022 in the face of rising US rates and global inflation, thanks to China’s relatively stable growth and inflation outlook.

More broadly, the mainstreaming of the China bond market is here to stay and, with its inclusion to major indices, we have seen already seen US$350 billion invested in the onshore China market since 20193.

1 Source: Bank for International Settlements, 31 March 2021.
2 Source: Bloomberg, JPM, 30 September 2021.
3 Source: People’s Bank of China, China Central Depository & Clearing, Shanghai Clearing House, 30 September 2021.

Authored by

Wilfred Wee
Co-Portfolio Manager, All China Bond

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