Résumé
China’s bond markets have historically been underutilised by many foreign investors, but things are changing. Steady reforms, an increasingly internationalised currency and attractive yields are resulting in increased inflows. Read these nine tips to understand the essentials of investing in China’s fixed-income marketplace.
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1 Source: Asian Bonds Online. Data as at 31 December 2020.
2 Source: FTSE Russell. Data as at 31 December 2020 (updated quarterly). FTSE Dim Sum Bond Index is an unmanaged index considered representative of the China offshore CNH bond universe.
3 Source: JP Morgan. Data as at 31 December 2020. JP Morgan Asia Credit Index (JACI) is an unmanaged index considered representative of the Chinese USD denominated bond universe.
*Index information for Exhibit 8: Asia ex-Japan equity is represented by MSCI AC Asia ex. Japan Index; Asia bonds by J.P. Morgan JACI composite Total Return; China onshore government by Markit iBoxx ALBI China Onshore Government (USD Unhedged) TRI; China onshore aggregate by Bloomberg Barclays China Aggregate TR Index; China A-shares by MSCI China A Onshore Net Total Return Index USD; emerging-market hard-currency bonds by J.P. Morgan EMBI Plus Composite; emerging-market local-currency bonds by J.P. Morgan GBI-EM Global Diversified Composite Unhedged USD; US investment grade by ICE BofA US Corporate Index; US high yield by ICE BofA US High Yield Index; global sovereign by J.P. Morgan GBI Global Unhedged USD; global aggregate by Bloomberg Barclays Global Aggregate Total Return Index Value Unhedged USD; global equity by MSCI ACWI Index; global emerging-market equity by MSCI Emerging Markets Gross Total Return USD Index; global REITs by MSCI World Real Estate Total Return USD Index. Investors cannot invest directly in an index.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Credit risk reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. Emerging markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
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Résumé
Notre monde a un visage métamorphosé. Afin d'aider les investisseurs à trouver leurs marques, nous avons identifié trois grands thèmes d'investissement : la Chine résurgente, la faiblesse persistante des rendements et la volonté de vivre et d'investir de manière plus durable. Nous mettons à profit notre expertise et nos connaissances pour expliquer pourquoi ces thèmes sont source des meilleures opportunités mais aussi des plus grands risques pour les portefeuilles. Et nous proposons aux investisseurs quelques pistes pour les gérer au mieux.
Synthèse
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There are three main ways to access China’s bond markets
China’s fixed-income marketplace isn’t monolithic, but it is massive. The onshore RMB segment alone is bigger than those in France, Germany and the UK combined (see Exhibit 1).
Three different investable markets for Chinese bonds
China’s currency has several names, but “renminbi” is arguably more important for bond investors
Outside of Asia, “yuan” is generally the term used to describe China’s currency. But “renminbi” (abbreviation: RMB) is the official legal name of China’s currency, and the term used the most in China and in Asia overall. Bond investors should be aware of the two kinds of renminbi (see Exhibit 2) used in financial transactions.
China’s regulators are intent upon making the onshore RMB currency (the CNY) a more “internationalised” one – similar to how the US dollar (USD) is used around the world to conduct transactions. That makes the onshore RMB bond market increasingly important.
Key renminbi facts for fixed-income investors
China’s onshore RMB bond market is large and growing
The total value of China’s onshore RMB bond market reached USD 15.5 trillion at the end of 2020, and many market participants are expecting the market to grow significantly in the coming years (see Exhibit 3).
China’s onshore RMB bond market is also diverse, with three main segments of the market: money market instruments, “rates” and “credits”.
Outstanding bonds by market
Source: Chinabond, Chinaclear, Wind, Standard Chartered Research. Data as at 30 June 2020.
The creditworthiness of onshore RMB bonds can vary widely
When investing in the onshore RMB bond market, it’s important to work with a partner who can help you assess the creditworthiness of an issuer. The credit quality of bonds issued by LGBs, SOEs and private companies can vary widely. Moreover, China’s onshore credit rating system differs from international rating conventions. For example, onshore bonds rated AA+ would typically be rated as “high yield” on an international scale (see Exhibit 4).
Onshore RMB bonds’ breakdown by credit rating
Source: Wind, Standard Chartered Research. Data as at 30 June 2020.
Foreign ownership of RMB bonds is rising
China has been making it easier for non-mainland China investors to access to its domestic capital markets. This has paved the way for Chinese bonds to be included in global benchmark indices – with the latest being the FTSE Russell WGBI in November 2021. China is also working to make the renminbi a more “internationalised” currency. Together, these factors should help international investors’ holdings of RMB bonds to rise over time.
But international investors still own less than 3% (about USD 540 billion) of the entire RMB bond market (see Exhibit 5). This is significantly lower than the 10%-25% foreign bond ownership range observed in other emerging-market nations. It is also lower than China’s representation in major global bond indices. This indicates that foreign interest will likely keep growing in the coming years.
Foreign ownership of China bonds
Source: CEIC, WIND, Citi Research. Data as at 31 January 2021.
Rising demand for the RMB may help RMB-denominated bonds to appreciate in value over time
In recent years, governments and companies have grown increasingly comfortable using the renminbi to conduct international transactions (see Exhibit 6). This can help these institutions eliminate currency risk, since one currency doesn’t need to be exchanged for the other – a process that can cause fluctuations in value.
Another factor making the renminbi attractive to international investors is the way China’s central bank – the People’s Bank of China, or PBoC – has resumed using conventional tools (such as adjusting the short-term interest rate) to enact its monetary policy. Compare this with the unconventional tools that other large central banks are using, such as the massive bond purchases known as “quantitative easing”. Some investors consider these tools to be less sustainable and possibly riskier. That makes the PBoC’s more conventional approach – and China’s renminbi – more attractive to many international investors.
As the international community turns to the renminbi, there should be a corresponding need for investors to seek investment assets denominated in renminbi. This may help lift the value of RMB bonds over time, which would likely benefit investors who already own these bonds.
Global central bank reserves (as at 2Q 2020) and projected growth of RMB usage in global reserves by 2030
Source for global central bank reserves: IMF, JP Morgan Asset Management. Data as at 31 October 2019. Source for projected growth of RMB: Morgan Stanley Research, Haver.
Onshore bonds can bring diversification benefits
Onshore RMB bonds have exhibited low correlations to other asset classes (see Exhibit 7). Case in point: onshore RMB bonds moved in the same direction as global bonds only 22% of the time. As a result, holding onshore RMB bonds in a global portfolio may improve overall diversification.
3-year return correlation of onshore RMB bonds vs other major asset classes
Source: Bloomberg. Data as at 31 December 2020.
Adding onshore RMB bonds can enhance the risk/return profile of investors’ portfolios
Over time, the returns of onshore RMB bonds have been steady. Moreover, their volatility has remained low, meaning there have been relatively few large swings either up or down. When these two metrics are taken together, they can be expressed as a “risk/return” profile. And as Exhibit 8 shows, onshore RMB bonds have an attractive risk/return profile compared with other major asset classes. That can make onshore RMB bonds a helpful addition to a range of portfolios.
3-year risk/return profile (in USD)*
Source: Bloomberg, Allianz Global Investors. Data as at 31 March 2021. Please see the disclosure at the end of this document for important index information.
China’s onshore bonds offer added yield potential in today’s low-yield environment
Interest rates in developed economies have been low or even negative for some time. This has contributed to low to negative yields for many types of bonds, as the accompanying chart shows. Moreover, given that the global economic environment continues to be somewhat weak, we expect interest rates to remain at the suppressed levels for some time. That makes it all the more important for investors to pursue sufficient sources of yield potential. Onshore RMB Chinese government bonds (CGBs) have a higher yield than most developed-market government bonds (see Exhibit 9). Moreover, CGBs offer an average credit rating of A+. That means investing in CGBs can provide investors with solid credit quality and attractive additional yields.
5-year government bond nominal yields
Source: Bloomberg, Markit IBoxx, JP Morgan, Allianz Global Investors. Data as at 31 December 2021. *Based on JP Morgan Asia Credit Index. Refers to yield-to-maturity (YTM). **Based on Markit iBoxx SGD Corporate Bond Index. Refers to annual yield.