Perhaps nowhere is China more ox-like than in its bond markets. We think that makes it a useful option for global investors.
Resolutely committed to orthodox monetary policy long since the rest of the world’s major economies abandoned it, Chinese authorities show no sign of diverting from their lonely furrow. As a result, China remains the only large and liquid fixed income market with positive real rates.
At the start of a new Chinese year, while developed bond markets are anxiously trying to figure out if we are entering a reflationary trend – which will herald the end of ‘lower for longer’ interest rates and the unconventional policy approaches that have accompanied them – Chinese bonds offer the prospect of continuity and carry.
More international investors are climbing aboard. In 2020, foreign inflows into onshore CNY bonds hit a new record of over US$150 billion. We expect the mainstreaming of Chinese bonds to accelerate this year, spurred by the imminent inclusion of China to the FTSE World Government Bond Index.
While China’s monetary policy remains firmly conventional in terms of its overall approach, its bond markets are far from static. For example, the Chinese corporate credit segment is continuing to mature, as regulators dismantle the perceived ‘state put’. This will pave the way for a healthier differentiation in credit spreads based on fundamentals, rather than proximity to the state. The broader point is that while we expect China’s bond markets to power along the same track they have ploughed for some years now, we should still expect to encounter the odd bump along the way. The resulting dispersion and volatility, around a steady channel, should make it an interesting year for active investors.
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