Investors can benefit from diversifying into Chinese bonds
Asian Fixed Income Spotlight

Investors can benefit from diversifying into Chinese bonds

Chinese bonds can offer portfolio ballast, attractive yield and two ways to achieve diversification based on the onshore and offshore nature of the market.

Amid the Covid-19 pandemic, China’s bond market can help investors address their need for yield while offering dual paths of diversification due to low correlation between 1. China and other major bond markets, and 2. the onshore RMB and offshore USD Chinese credit markets.

1. Low correlation between China and other major bond markets:

  • May benefit investors from other regions, regardless of home markets.
  • Partially a result of low foreign participation in the Chinese bond market.
  • This means the impact of external volatility is limited as foreign ownership still remains low, and investors can see onshore bonds as a way to diversify their portfolio.

Diverging paths
China’s bond market correlations with other major bond markets, May 2020

Diverging paths


Source: BlackRock, May 2020. Correlations shown reflect 3-year weekly correlations of 5-year government bonds across the world’s top five bond markets.

2. Low correlation between the onshore RMB and offshore USD Chinese credit:

The same issuer may offer different yields across the onshore and offshore markets, enabling managers to exploit yield differentials to generate additional returns, while taking similar credit risks. 

  • Onshore credits are RMB-denominated and sensitive to Chinese monetary conditions and other onshore-market factors.
  • Most offshore credits are U.S.-dollar denominated, subject to global risk factors

Arbitrage opportunity
China’s bond market annualized returns, 2017–2Q 2020 

Arbitrage opportunity


Source: BlackRock, May 2020. USD China Bond represented by the J.P. Morgan Asia Credit Index (China CNH hedged); Onshore Bond represented by the China Credit Bond Index. Investors cannot directly invest into an index. Past performance is no guarantee of future results. Not a recommendation to buy or sell. Subject to change.