New opportunities in Chinese bonds


2019/04/23 15:01

    China’s local-currency bond market is opening up to global investors.


    China’s local-currency bond market is opening up to global investors. The Bloomberg Barclays Global Aggregate Index begins including yuan-denominated bonds this month, automatically adding exposure to such bonds for index investors. We favor maintaining such passive exposure and preparing to invest more.

    中国的本币债券市场正在向全球投资者开放。彭博巴克莱全球综合指数(Bloomberg Barclays Global Aggregate Index)本月开始纳入人民币计价债券,自动增加指数投资者对此类债券的敞口。我们倾向于保持这种被动敞口,并准备加大投资。

    The inclusion of local-currency government and policy bank securities into the global bond market benchmark index is set to gradually occur over a 20-month period. Those passively invested in that index will, by default, add Chinese bond exposure to their holdings – which we view as a positive. Local-currency Chinese bonds are set to make up roughly 6% of the global fixed income benchmark when the phase-in is complete. At that stage, China’s yuan currency will be the fourth-largest component in the index, behind the U.S. dollar, euro and Japanese yen. The chart above shows one reason we advocate investors maintain the inclusion exposure: Local-currency Chinese bond yields this decade have been materially higher than the average yields of the developed market bonds that make up the majority of the global bond index. See the top line in the chart above.


    A very good place to start


    We see China becoming a growth turnaround story this year, as policy makers ease fiscal and monetary policies and market fears of a U.S.-China trade war dissipate (see our Q2 Global investment outlook). Improvements in the domestic economy should result in rising yields and a stable or appreciating yuan currency. Christian Carrillo of BlackRock’s Asia Pacific fixed income team sees the higher yields of Chinese bonds creating a tactical opportunity to add additional exposure in the future. His team estimates the fair value yield of 10-year Chinese government bonds will rise slightly in the second half amid positive economic data surprises and stabilizing inflation, but actual yields may rise more. Chinese bond prices may decline a bit as yields rise, but investors maintaining exposure stand to benefit from both relatively high income and potential currency gains.

    随着政策制定者放松财政和货币政策,以及市场对美国经济增长前景的担忧,我们预计中国今年将成为经济增长的转折点。国内经济的改善应该会带来收益率的上升和人民币的稳定或升值。贝莱德(BlackRock)亚太固定收益团队的克里斯蒂安•卡里洛(Christian Carrillo)认为,中国债券收益率上升,为未来增加额外风险敞口创造了战术机遇。他的团队估计,由于正面的经济数据出人意料,通胀趋于稳定,下半年中国10年期政府债券的公允价值收益率将小幅上升,但实际收益率可能上升得更多。随着收益率上升,中国债券价格可能会小幅下跌,但保持风险敞口的投资者将从相对较高的收入和潜在的人民币升值中获益。

    China’s bond market has been dominated by domestic investors, and offers diversification benefits as a result. The correlation between Chinese bond and U.S. Treasury prices has been close to zero over the past five years. This benefit may diminish over time as foreign investors’ ownership share of the market increases.


    What are the other risks and challenges?


    We believe investors who hedge their currency exposure should take a patient approach toward Chinese bonds, as hedging costs currently are significant. This could improve over time as affordable hedging instruments become available. Liquidity is also a concern, particularly for investors with shorter-term horizons. The domestic Chinese investor traditionally has had a “buy and hold” approach to investing. As more foreign investors gain access to this market and trading begins between onshore and offshore players, liquidity should improve.


    Bottom line


    China’s bond market is the world’s third-largest, with about $13 trillion in outstanding bonds. We believe the market’s size, attractive yields and diversification benefits mean it cannot be ignored, similar to our view on China’s domestic equity market. We see China’s inclusion in global bond benchmarks as a key event. Understanding the market is key. We believe maintaining automatic exposures and preparing to invest more is a very good place to start.


    Scott Thiel is BlackRock’s chief fixed income strategist, and a member of the BlackRock Investment Institute. He is a regular contributor to The Blog.

    斯科特•泰尔(Scott Thiel)是贝莱德首席固定收益策略师,也是贝莱德投资研究所(BlackRock Investment Institute)的成员。他是该博客的定期撰稿人。

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