Foreign institutional investors keep increasing their holdings of Chinese bonds for 19 consecutive months. What makes China’s bond market attractive to foreign investors? Edmund Goh from Aberdeen Standard shared his views.
13 July 2020
In the first half of 2020, data from CCDC (China Central Depository & Clearing Co., Ltd.) shows an increase of RMB319.04 billion in foreign institutional investors’ holding of Chinese bonds, 2.3 times the same period last year. Foreign institutional investors keep increasing their holdings of Chinese bonds for 19 consecutive months, despite the COVID-19 pandemic. As of the end of June 2020, around 900 foreign institutions from nearly 60 countries have entered China interbank bond market. The amount of Chinese bonds held by foreign investors has reached RMB 2.4 trillion, accounting for 2.4% of the total, and the amount of government bonds held by foreign investors accounts for 9% of the total government bond markets.
What makes China’s bond market attractive for global investors? In terms of yield, diversification and liquidity, what sort of advantage does China’s bond market have, compared with other markets? And why local expertise is important in Chinese bond investment? ATC Initiative interviewed Edmund Goh, Investment Director of Aberdeen Standard, who gave his answers.
“It’s a bond market very difficult to avoid in the future. It’s a matter of time for foreign investors to get involved, no matter what channel or way you choose to invest. We think that is an advantage of getting in early to get familiar with the Chinese market.
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Q: What are the main arguments you will make for global investors to increase investment into China’s bond market?
- Stable currency: China should not be excluded from the global supply chain and China has more prudent monetary policy;
- Relatively high yield: China provides higher yield versus duration risk compared with other markets;
- Diversification: The correlation between China’s bond market and other global bond market is low and China has a different economic cycle.
Q: In terms of yield, what sort of advantage does China’s bond market have, compared with other markets?
- Compared with the US and Japan, on the average, China’s bond yield is 200 bps higher;
- This level of yield can sustain: PBOC is more prudent with using monetary policy as a tool to stimulate the economy and keep their “bullets” in case there is big downturn.
Q: In terms of diversification, what is the correlation between China’s bond market and global ones and why?
- The correlation between China’s bond markets and other bond markets remain low across different periods of time;
- The reason behind the low correlation: it is a largely local driven market, more than 90% of investors are locals; China has a different economic cycle compared with the US;
- The US and other EM markets were facing a big shortage of liquidity in their treasury and credit bond markets in March this year when the liquidity of China’s bond market is quite ample.
Q: Some people have the view that China’s bond market is relatively low in liquidity, do you agree?
- For foreign investors, less popular bonds should be stripped out when considering the liquidity. At present, Aberdeen Standard Investment focus on government bonds, policy bank bonds and quasi-sovereign bonds which have good liquidity;
- Moving 200 million RMB in interest rate bonds and 50 million RMB quasi-sovereign bonds is not an issue, even during times of stress;
- Foreign investors can select what liquidity to trade.
Q: How does the unique liquidity situation of China’s bond market affect the yield curve and again how can a skilled manager leverage these in their investment?
- The yield curve of China’s bond market is not always efficient, that justifies the necessity of active management of the portfolio;
- There are some Alpha opportunities that can be generated from yield curve efficiencies with deeper understanding of local China’s bond market.
Q: A lot of global investors now invest in Chinese government bonds and policy bank bonds, while the corporate bond sector is rarely explored. What has Aberdeen Standard done in China’s corporate bonds?
- Trading quasi-sovereign bonds are much more rewarding than other corporate bonds;
- Foreign investors can take advantage of zero per cent coupon tax policy and tax holiday on quasi-sovereign bonds;
- quasi-sovereign bonds have low credit risk;
- Moving lower to the credit curve is not recommended, because the credit spread is much wider at the off-shore market than the on-shore market.
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