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Why Chinese bonds are becoming more attractive for international investors

Rajeev de Mello explains the attractions of Chinese bonds and gives an overview of the new Bond Connect scheme making it easier for global investors to access the market.

09/08/2017

Rajeev De Mello

Rajeev De Mello

Head of Asian Fixed Income

Chinese bonds are attractive for global investors for two reasons. One is that it’s the biggest market in the world outside of the US and it has continued to grow over the last couple of years. To have a global portfolio without China is a huge imbalance.

Secondly, China offers significantly higher yields than advanced economies – 5-year Chinese bonds yield about 3.5%. This is attractive considering that the Chinese currency is managed against a basket of currencies so it’s actually quite stable.

What is Bond Connect?

Bond Connect is a new scheme which allows foreign investors to invest in the Chinese onshore bond market in a much easier fashion than the previous schemes established over the past five years.

Bond Connect allows international investors to invest into onshore China via Hong Kong and avoids a lot of the paperwork and documentation and counterparty risk which the previous schemes offered.

So we expect, and we are already seeing, a lot more interest from global investors in this new way of accessing the exciting Chinese bond market.

Chinese bonds may offer value

Chinese yields have risen over the past couple of months whereas a lot of global yields have actually declined. This means there is an interesting difference between China and the rest of the world at the moment.

Also, the Chinese currency, which has weakened over the past two years, has stabilised and probably offers some value for global investors currently.

Protecting portfolios from currency risk

Global investors are worried that the Chinese currency may be volatile and could decline. For us as active investors it is absolutely critical to protect the portfolio from any decline in currency.

How do we do it? Well, the first thing we do is determine a period of time when that risk is more present than others. And then we use onshore or offshore forwards to hedge that risk in an active and dynamic fashion.