Think diversification, think China bonds

I have with me today Corwin Huang, Lead product strategies at Blackrock Asian credit. From a macro economic perspective, how would you differentiate China as opposed to other developed markets?

I think for our viewers, what's most important here is how that interplays with how portfolios are constructed. Divergent macro economic environments between the developed markets in China drives divergent financial market performance. And that allows investors to be portfolios in a fundamentally less correlated to each other and creates better diversification benefits. Specifically right now, since the start of this year, China has been maintaining an environment where liquidity remains quite flush, monetary policy remains quite complicated. In fact, just very recently, China recently cut rates as well. So this means that yields onshore remain quite low, and with low volatility. So this allows investors to use onshore Chinese bonds as a building block to diversify portfolio risk without sacrificing too much financial performance.

Why should investors be investing in China right now? And what benefits can a typical China bond strategy bring to investors who are very cautious about the market?

Investing in China is not about market access. It's about using China as a building block to create a Fixed Income Solution that optimizes for yield and volatility. Now, China is a very deep market, it's now the second largest credit market in the world between the onshore and offshore market, so there is a very deep pool of attractive yielding assets to invest in. The second part of the building block here is diversification, because in order to create a Fixed Income Solution that optimizes for income for you, without taking on too much volatility, your fundamental building blocks need to be diversified. And the onshore and offshore market doesn't move together with each other because they're driven by fundamentally different risk drivers. The onshore market is driven by onshore monetary policy, whereas the offshore market is affected by global risk sentiment and exogenous factors that is beyond China risk factors. So creating a Fixed Income Solution that goes across both the onshore and offshore markets, may help us to maximize yield and at the same time, minimize volatility, in order for us to create a fixed income solution that is attractive to end investors, which is really ultimately, as is the case for all fixed income products to maximize risk adjusted income. So this is really not about a simple China solution. This is about using China as a building block to create a fixed income solution that has attracted yield with diversification and relatively low volatility to allow investors to achieve a higher risk adjusted income.

Speaking of diversification, how is Blackrock investing across onshore and offshore China credit?

At this point in time, we see quite balanced risks between the onshore and offshore market, the onshore market continues to serve as a very important building block to diversify our risk nearshore market however, models of accommodative monetary policy means that yields on shore are right now, at a relatively moderate level, which means the end at the same time, the offshore market has seen an adjustment in spreads and yields on the back of rising rates in the developed markets. So, at this point in time, we are maintaining a relatively balanced view between the onshore the offshore market to really maximize the income that we can generate across both markets, while achieving maximum diversification between the onshore and offshore market. So, right now, pretty much quite a balanced position.

In an investor’s portfolio, a typical portfolio for example, when you want to allocate between onshore and offshore, what would you recommend more exposure to the onshore the offshore market in terms of allocations?

It’s got to be dynamic here. And that's what makes a really, really good portfolio management team. The ability to move dynamically onshore and offshore drives success in managing the China fixed income portfolio. We don't typically maintain, even split across onshore and offshore for very long periods of time, because as I mentioned, both markets move very differently from each other. And at any point in time, you'll typically find one market being more attractive than the other. So allowing portfolio managers to move dynamically onshore and offshore allows us to capture those opportunities in a timely fashion to achieve very attractive long term outcomes.

Thank you for speaking with us today. My pleasure.