Strong investment case for China bonds

China’s inclusion into major bond indices is an exciting step for this asset class. We look at five reasons why this is an increasingly important asset class for investors’ portfolios.

1 Jun 2021

3 minutes

China’s inclusion into major bond indices is an exciting step for this asset class. We look at five reasons why this is an increasingly important asset class for investors’ portfolios.

China’s inclusion into major bond indices is an exciting step for this asset class. China is not a typical emerging market. As the world’s largest official creditor nation, China is highly rated, the renminbi exhibits lower volatility versus other foreign exchange markets and its fixed income markets act as a great diversifier to developed market bonds.

Wilfred Wee and Alan Siow, Portfolio Managers at Ninety One, discuss why this is an increasingly important asset class for investors’ portfolios.

Q What makes ‘China bonds’ a unique asset class?

As the world’s second largest bond market, China fixed income offers multiple investment opportunities with significant scope for growth. Domestic financial reforms and the opening-up of China’s capital account has enabled foreign investors to increase their allocations to Chinese bonds, which are now included in all major global bond indices.

  • The onshore CNY interbank bond market includes issuance by the sovereign and regional governments, policy banks, as well as large state related enterprises. One of the largest indices covering the market is the Bloomberg Barclays China Aggregate Index, which has tracking assets of US$6.8 trillion and includes more than 1,900 bonds issued by more than 300 entities1
  • The offshore USD market is characterised by a broad mix of borrowers, the majority of whom are rated by the international agencies, namely Moody’s, S&P and Fitch. The JP Morgan Asia Credit Index has a market capitalisation of US$720 billion, providing more than 1,200 bonds from 400 issuers from Greater China1
  • Other smaller Chinese bond markets include one for offshore CNH bonds, known as the ‘Dim Sum’ market and another for onshore CNY bonds, called the ‘Panda’ market where issuers are international non-Chinese entities.
Q What are the benefits of investing in China bonds?

In contrast with most international government debt currently registering negative real yields, China bonds supply a relatively high yield. In addition, the price behaviour of Chinese bonds is also usually less volatile, and as a result they have a superior risk-return profile. China’s high creditworthiness means that onshore CNY bonds also offer a relatively strong defensive profile to investors.

Offshore, Chinese USD bonds provide an attractive risk premium as credit spreads of Chinese companies have historically been up to 210 basis points higher than their BBB rated peers in the US2. When global markets have sold-off, offshore China bonds have often outperformed US credit spreads.

Another key benefit of an allocation to China bonds is that they provide a diversified source of returns. While diversification is a cornerstone of investing, it is increasingly hard to achieve, but because China’s growth and inflation outlook reflect domestic factors rather than global trends, this means that China bonds have a low correlation with major global risk asset classes. As a result, an allocation to China fixed income can potentially enhance a portfolio’s risk-reward characteristics by reducing overall portfolio volatility, while potentially increasing returns.

Q How do you view prospects for the RMB?

We expect the RMB to outperform its trading partners, albeit at a more modest pace after the significant rally in recent months, helped by exports boosting the trade surplus. Until outbound tourism picks up decisively, which we do not expect any time soon, the overall balance of payments is in China’s favour with the outlook for exports looking attractive. Headline geopolitical risks are also likely to de-escalate following the installation of a new US administration.

Q What are the expected sources of returns from investing in China bonds?

We expect that onshore CNY bond yields will remain range-bound, and possibly move higher as global COVID-19 vaccines are rolled out. Onshore CNY investment grade corporate bond yields can often be more attractive than their offshore USD investment grade counterparts and could provide attractive opportunities with less duration risk from time to time. For offshore Chinese USD bonds, we think that valuations have become rich and we see limited potential for capital gains. Most returns will come from holding higher yielding bonds over lower yielding ones, assuming prices remain constant. We prefer some select high-yield bonds with good underlying fundamentals and where valuations remain attractive over investment grade corporate.

Q What measures does Ninety One take to mitigate default risk on the onshore credit space?

We do not expect a meaningful increase in defaults in 2021 compared with 2020, but as recent volatility has shown, market sentiment can be fragile. Our process is to apply a rigorous bottom-up fundamental assessment of possible investments, and we do not consider an issuer unless we have carried out detailed credit analysis, which consists of a full financial model and investment note. We believe that our bottom-up fundamental investment process, combined with our in-depth industry and market experience has helped to avoid the problem issuers.


1Source: Bloomberg, JP Morgan, 31 December 2020. 2Source: JPMorgan, December 2020. Offshore, Chinese USD bonds: JPM Asia Credit Index – China; their BBB rated peers in the US: JPM US Liquid Index – BBB.

Authored by

Wilfred Wee
Co-Portfolio Manager, All China Bond
Alan Siow
Co-Portfolio Manager, All China Bond

Important Information

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. Investment involves risks. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

In Hong Kong, this communication is issued by Ninety One Hong Kong Limited and has not been reviewed by the Securities and Futures Commission (SFC).

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2021 Ninety One. All rights reserved.

Past performance figures shown are not indicative of future performance. Investors are reminded that investment involves risk. Investors should refer to the offering documents for details, including risk factors. This website has not been reviewed by the SFC. 

By clicking on the hyperlink of Investor relations below, you are leaving this website with information specific for retail investors in Hong Kong and entering the global website.

Please note that the global website is not intended to target Hong Kong investors. It has not been reviewed by the Hong Kong Securities and Futures Commission (“SFC”). The website may contain information on funds and other investments products that are not authorised by the SFC and therefore are not available to retail investors in Hong Kong. The website may also contain information on investment services / strategies that are purported to be carried out by a Ninety One group company outside of Hong Kong.

Any product documents and information contained in this website are for reference only and for those persons or entities in any jurisdictions or country where the information and use thereof is not contrary to local law or regulation.

Issuer: Ninety One Hong Kong Limited
Email: [email protected] 
Telephone: (852) 2861 6888 
Fax: (852) 2861 6861