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CHINA BONDS

Investing in a pivotal moment

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Local currency bond market opening to global investors

China’s onshore bond market is the 2nd largest globally and it has expanded at a double-digit growth rate per year to USD 17.5T1. This large market has seen such rapid growth, despite being
dominated by domestic investment with 97%2 being Chinese owned.

However, this dynamic is poised to change; as the market opens to foreign investors and major benchmark providers begin to include Chinese government bonds in their indices.

1Source: WIND, as of December 2020.
2Source: JP Morgan, WIND September 2020.

The US$18T bond market has developed significantly over the past decade

Chart showing development of USD Chinese credit and Renminbi Bonds

For illustrative purposes.
Source: WIND, JPMorgan JACI China Bond Index as of 31 March 2021.

China as a source of yield…

With today’s fixed income markets mainly driven by central bank policies, negatively yielding debt has grown at a record pace. The extraordinary level of central bank stimulus has pushed interest rates lower, and as a result, the search for yield has never been stronger.

Looking at the portion of the fixed income market which yields over 2.5%, more than half is made up of China bonds. Given the size of the China bond market and interest rate differential compared to developed markets, China offers a significant source of yield.

China accounts for more than half of global bonds yielding more than 2.5%

Chart showing % of China bonds of the bonds that yield more than 2.5%

For illustrative purposes.
Source: WIND, BBGBarc Multiverse Index as of 31 March 2021.

…a key component of global bond indices…

As of April 2019, the Bloomberg Barclays Global Aggregate Index added Chinese sovereign and policy bank bonds. As of 31 March 2021, the index now includes over 300 Chinese securities which represent 6.5% of the USD 68T current market capitalisation. Only USD, EUR and YEN denominated bonds make up more of the index than those issued in CNY.

In March 2021, FTSE announced that Chinese local government bonds would be included in the FTSE World Government Bond Index (WGBI).

Global Aggregate Bond Index currency breakdown

Chart showing global Aggregate Bond Index currency breakdown

For illustrative purposes.
Source: BlackRock, Bloomberg Barclays as of 31 March 2021.

…and provides diversification benefits

Onshore China bonds have historically shown low correlations with both developed and emerging markets. The benefits of diversification were tested during the Covid-19 volatility. During the sell-off, onshore China bonds remained resilient, and demand for Chinese assets became stronger as investors recognised the diversification role that China bonds play in their portfolio. When markets came under pressure due to the pandemic in Feb-Mar 2020, China bonds delivered a 2.7% return while equity markets and emerging market debt returned negatively.

China rates acted as a flight-to-safety exposure during risk-off periods

Chart showing performance February-March 2020

For illustrative purposes.
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Source: BlackRock, Bloomberg, 31 March 2021. China Bonds: Bloomberg Barclays China Treasury & Policy Bank Index. China Equities: CSI 300 Index. US Equities: S&P 500 Index. EM LCY Debt: JPM GBI-EM Index Global Diversified (unhedged).

 

Five-Year performance table Currency 31 Mar 20 - 31 Mar 21 31 Mar 19 - 31 Mar 20 31 Mar 18 - 31 Mar 19 31 Mar 17 - 31 Mar 18 31 Mar 16 - 31 Mar 17
Bloomberg Barclays China Treasury +
Policy Bank Index
USD 8.47% 1.29% 1.60% 11.08% -6.35%
Shanghai Zhenzhen CSI 300 Index CNY 39.85% -2.66% 1.56% 15.09% 9.85%
S&P 500 Index USD 56.33% -6.99% 9.49% 13.98% 17.16%
J.P. Morgan EMBI Global Div. Index USD 13.03% -6.52% -7.58% 12.99% 5.47%

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. All index returns are expressed as gross of fees. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

Source: Bloomberg, as of 31 March 2021.

Blending China active and indexing in your portfolio
Did you know that a strategic underweight to China bonds vs the Global Aggregate Index is an active bet and can cost the portfolio up to 36 bps of tracking error? There are many ways to incorporate China into your fixed income allocation.
Boats on still water

Source: BPAS EMEA, MSCI, Bloomberg Barclays as at 15/03/21. Portfolio average allocation figures based on BPAS EMEA client portfolios gathered between 31 Dec 2019 and 31 Dec 2020. Please see appendix for details.

Instant access to China
Have you considered using China bond funds to gain instant access to the Chinese debt market?

BlackRock brings onshore China bonds to global investors in a scaled and liquid manner through both exchange traded funds (ETFs) and active mutual funds.
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Meet your partner
Discover how BlackRock Portfolio Analysis and Solutions (BPAS) can help you integrate China into your fixed income allocation across active and indexing strategies.
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Learn more about the China opportunity

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Why BlackRock for China

1

Experience and expertise

Flagship active China credit strategy is the largest globally and ranked 1st Performance Quartile by Morningstar peer group since inception.1

Flagship China onshore rates ETF is the largest China bond index fund globally.2

2

Local presence, size and scale

Dedicated onshore & in-time zone presence (Shanghai and Singapore) in portfolio management, research and trading across China bond index and alpha seeking strategies.

Centralised platform to optimally source liquidity for portfolios globally using Aladdin.

3

Trading access

Winner of the Asset Manager Category award in 2019, 2020 at Bond Connect Anniversary Summit.3

Direct onshore relationships alongside global counterparties, including onshore dealers, securities houses, Chinese subsidiaries of foreign banks.

All sources as of 30 April 2021.
1Source: Morningstar as of 30 April 2021, since fund inception/re-launched in November 2011.
2Source: BlackRock as of June 2021.
3The Summit convenes Chinese and global financial policymakers, financial infrastructure providers, and market experts to engage on issues of the development and connectivity of Chinese and global markets, as well as recognizes the contributions of market participants with official awards.