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Investec Has Six Reasons Why Investors Will Buy More China Bonds

Investec Has Six Reasons Why Investors Will Buy More China Bonds

  • Index inclusion will lead to demand for China debt: Investec
  • Attractive yields, low correlations will appeal to investors

People walk along an elevated walkway as an electronic ticker displays stock figures in Pudong's Lujiazui Financial District in Shanghai.

Photographer: Qilai Shen/Bloomberg
Photographer: Qilai Shen/Bloomberg

Global investor exposure to Chinese securities has plenty of room to grow in coming years, especially in fixed income, as the world’s second-largest economy increasingly opens up its market to the rest of the world, according to Investec Asset Management.

While investors have paid plenty of attention to the recent inclusion of China’s A-shares into MSCI Inc.’s benchmark indexes, the announcement of Chinese bonds’ inclusion into the Bloomberg Barclays Global Aggregate Index has been met with much less fanfare, said Wilfred Wee, portfolio manager with Investec.

“As access to China’s capital markets improves and international investors gain more insight into its fixed income asset class, we believe that Chinese bonds will increasingly feature in their portfolios,” Wee said in a note to clients Thursday.

Foreigners held about 1.4 trillion yuan ($219 billion) of onshore China bonds at the end of the first quarter of 2018, three times the amount held four years previously, Wee said.

Read more on Goldman seeing U.S. investors warming to China’s bond market

Here are six reasons why Wee sees foreign holdings growing further:

  • Mature Market: While China’s bonds tend to be viewed as emerging-market assets, their characteristics are more in line with those of developed markets when it comes to volatility and size
  • Index Inflows: The market will benefit from more inflows from China’s inclusion in benchmark bond indexes managed by Bloomberg and Barclays Plc, as well as FTSE Russell and JPMorgan Chase & Co.
  • Outperformance Potential: China debt offers healthy yields compared with developed market peers
  • Corporate Offering: Plenty of Chinese companies have issued debt in the international dollar-bond market and have relatively high credit quality
  • Currency Support: China’s ability to consistently run a trade surplus against major economies will help minimize the risk of currency exposure
  • Diversification Benefit: Chinese bond returns tend to be lowly correlated to other asset classes as China’s interest-rate movements are largely based on domestic factors

— With assistance by Andreea Papuc