Seeking yield and safety in the time of a pandemic
Asian Fixed Income Spotlight

Seeking yield and safety in the time of a pandemic

Chinese bonds offers risk diversification and growth potential with relative lower volatility in a period of uncertainty

As the rest of Asia remain in various degrees of lockdown in response to the COVID-19 pandemic, China, on the other hand, has started to return to a level of pre-virus activity. Shanghai’s Disneyland reopened after a 3-month hiatus welcoming 24,000 visitors per day 1. People in the inner city of Chongqing queued up for hours outside of hotpot restaurants as soon as the government lifted a ban on dining-in. These demonstrate the underlying vibrancy of the world’s second largest economy and provide a glimpse of how its consumption power may rebound when things return to normal.

In the past few months, China implemented some aggressive tactics to combat the coronavirus. These decisive moves paid off: the country has come through the first wave of infections and is gradually resuming business with almost the entire industrial capacity back online. While much of the rest of the world remains largely locked down, China may end up being the few economies posting growth in 2020, in stark contrast to sharp declines in economic activity expected in Europe and the US 2.

Why should you be excited about China?

Even before the pandemic, China was viewed as a vigorous economy well known to be investing heavily in itself. The enormous amounts of money poured into innovative industries such as semiconductors, pharmaceuticals, renewable energy and the like transformed what was once the world’s sweatshop to a leading technology powerhouse. Post-pandemic, potential public and private investments could ignite exciting opportunities in China’s capital markets including the US$14 trillion bond market, now the world’s second largest and is growing at mid-to-high double digits every year 3.

Its increasing international recognition, highlighted by the gradual inclusion into world bond indexes, not only reassures investors of its regulatory standards but also signals a potential inflow of foreign money in the years to come.

China’s evolving bond market – a sweet spot

To help the economy recover, Chinese authorities have aggressively conducted quantitative easing and indicate readiness for fiscal support as banks extended more loans to enterprises. Market rates moved slightly lower, but the Chinese central bank did not join its western counterparts to drastically cut interest rates.

The Chinese bond market can be divided into two spaces – the onshore renminbi bond market and the offshore USD-denominated Chinese credit market. Their participants, however, are starkly different. The onshore market is driven mostly by local investors and subject to local sentiments and perceived risks, while international money is mostly allocated offshore.

Looking into the onshore space

The onshore bond market behaves quite differently from the rest of the world. For example, it exhibits lower volatility in recent years. Its low correlation is highlighted in its immunity to the pandemic-induced global market rout hitting US equities and other emerging market credits, finishing the first quarter of 2020 with positive returns. Chinese bonds, in particular the onshore bonds, provide a timely, golden opportunity for investors to diversify risks at a time when global markets are expected to remain volatile as the coronavirus pandemic evolves.

Returns on Onshore China Bonds in Period of Uncertainty


Source: BlackRock, Bloomberg, end March 2020. Onshore China Bonds: Bloomberg Barclays China Aggregated (USD-H). China Equities: CSI 300 Index. US Equities: S&P 500 Index. EM Debt: JPM Emerging Markets Bond Index Global Diversified. Past performance is not a guide to future performance. Index performance is for illustrative purpose only. Investors cannot directly invest into an index.

Investing in Chinese bonds may help investors to capture yield and growth as income-seeking investors take the flight to quality in an uncertain global landscape. Also, Chinese bonds have been resilient and exhibited relatively low drawdowns in March amidst the volatility thanks to the diversification between the onshore and offshore Chinese bond markets.

To sail through today’s extremely unstable market environment, assets that can both diversify risks and deliver yield are more important than ever. To that end, China’s onshore fixed income market is an attractive opportunity that investors could consider. Chinese onshore bonds are less correlated to the offshore dollar bond, which provide portfolio diversification, and the opportunity for long-term returns.  Onshore China bonds as an asset class should remain well-supported from inflows driven by index inclusion in the coming years 4.

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