Six reasons China's bonds are appealing

David Cheng, Investment Director, Fixed Income

The China fixed income market has been resilient during the Covid-19 pandemic. We explore the key reasons why investors should not ignore this large market and the potential role that China bonds can play in a diversified portfolio.

The economic fallout from Covid-19 has, if anything, further highlighted the attractiveness of the Chinese government and corporate bond markets and the role that Chinese bonds can play within an investor’s portfolio.

China fixed income performed relatively well during the Covid-19 market downturn earlier in 2020. Chinese government bonds provided investors with the risk hedging benefits of a defensive asset whilst onshore Chinese corporate bonds were one of the only major credit markets to provide positive returns during this period.

We take a closer look at the China fixed income market and outline six reasons why it looks attractive.

Attractive valuations and yields with room for further price appreciation

First, absolute yields on China’s onshore bonds are trading at their most compelling levels relative to global developed market sovereigns. We believe China government bonds at around 3.25% offer an asymmetric return profile for investors, with limited downside but potential for price appreciation. China government bonds are at their widest spread levels versus global sovereigns over the past 10 years, thanks to the strength of the Chinese economic recovery from the pandemic.



Also, the fact that Japanese and German bonds failed to provide downside protection in the first quarter of 2020 suggests that the role of the traditional bond markets as defensive assets in the next downturn may be limited when yields are at zero percent.  This makes China’s government bonds a compelling alternative as a high-quality defensive asset for many investors.

Chinese corporate bonds also boast attractive yields and wider spreads with lower duration risks than other global credit markets. The investment grade market has delivered relatively steady performance over the last five years. In today’s historic low interest rate environment, this additional income and carry benefit could prove to be even more valuable for investors.



China fundamentals are strong

China is expected to be the only major economy to generate positive GDP growth in 2020 as it successfully rebounds from the pandemic slump.  Inflation remains subdued as global demand has stayed weak.  This favourable dynamic of positive growth with low inflation has provided the People's Bank of China with more flexibility in its monetary policy, allowing it to more effectively support Chinese companies.

The sector composition of the China credit market makes it more Covid-19 resilient

China’s corporate bond market has limited exposure to oil and gas and hospitality sectors, and greater exposure to state-owned enterprises supported by the government, as well as domestically driven sectors, with the property sector that seeing continuing favourable fundamental demand. This makes the China corporate bond market less sensitive than most other credit markets to the ongoing Covid-19 shock.

While China’s bond default rates have risen in 2020, along with those of global credit markets, they have been more concentrated in select industrial issuers. We expect the combination of policy support, steady economic growth, and a more favourable market structure to lead to lower corporate default rates than those of other global companies.

Domestic ownership is a strong technical support

The mainly domestically held bond market differentiates China’s market structure from most other emerging markets that are more vulnerable to the volatility of global capital flows and external funding pressure. 

The continued global bond index inclusion of China bonds and the further internationalisation of the renminbi are both positive tailwinds for China bonds.  In fact, by August 2020, year to date flows into China’s onshore fixed income market had already exceeded the total annual flows seen in any previous years in its history, highlighting the strength of global investor demand.

Positive momentum for the renminbi

We believe the US dollar is on a structural weakening trend due to its large twin deficits and unlimited quantitative easing (QE) programs. 

China’s expanding economic outperformance, high rate differentials against major economies, improved current account, portfolio inflows, as well as pent-up demand for global investors to diversify away from the US dollar should justify a stronger yuan going forward.

Chinese bond market is deep and diverse, with low correlation to global equities and bonds

We expect onshore Chinese bonds to remain a unique asset class exhibiting low correlation to global markets.  Why?  The Chinese economic transition to a more domestic consumer driven market has been accelerated by both the US trade tensions and the rise of the Chinese middle class. 

This domestic focus and “decoupling” from the US would suggest that China’s economic and monetary policy cycles may not be perfectly synchronized with other parts of the world, leading to lower correlations of Chinese assets with other markets. The fact that we are seeing People's Bank of China take a more measured approach in its monetary policy than most developed markets is an example of this.


We expect the favourable risk-return profile, attractive valuations and the diversification benefits to persist for China’s fixed income market. It’s hard to ignore this very large market, especially against a backdrop of lower interest rates and higher volatilities globally. 

China’s bond market could be the defensive asset class that provides both the return potential and the downside protection that investors are searching for.

Read the full report


Important Information
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Emerging Markets page to discover how we help our clients capture the emerging market growth with confidence.

Contact Us

Level 33, Two Pacific Place,
88 Queensway,
Hong Kong
(852) 25211633
Online enquiry: Please complete the web form below and
we will reply as soon as possible.
Contact us