Chinese language bond markets attracted foreigners and US traders
BEIJING – US investors are among the many foreigners looking to benefit from China, especially the bond market.
A clear area of interest are government bonds, where the Chinese 10-year yield is over 3.2%. In contrast, the recent surge in US interest rates has pushed 10-year government bond yields to just 1.7%. This big difference offers investors in Chinese government bonds a significantly higher return.
“US investors remain keen to invest in the Chinese market,” said Tao Wang, head of Asian economics and chief economist for China at UBS, during a webinar with the Institute of International Finance on Thursday. “From the point of view of the bond market in particular, interest is increasing structurally.”
While “China offers high and stable returns,” she noted that other countries are still applying growth-stimulus measures that have resulted in negative returns on many bonds. This means that bond buyers have to pay the issuer when the bond matures rather than making money from it.
No specific data was available for US investor holdings, but investors outside of mainland China held about 3.5% of the existing yuan bond issue at the end of February, according to Reuters. In particular, the foreign holdings of Chinese government bonds reached about 10.6% of issuance last month, Reuters said.
In just two years, foreign holdings of Chinese government bonds have nearly doubled to over 2 trillion yuan ($ 307.7 billion), according to Wind Information.
The increased interest is due to the addition of Chinese bonds to major investment indices tracked by global investors, resulting in billions in Chinese debt purchases.
Fixed income portfolio manager Jason Pang in Asia said these purchases have increased in recent months for JP Morgan Asset Management’s China Bond Opportunities Fund.
“There’s no clear reason why we shouldn’t get out of this particular market,” he said. Pointing out that the Chinese economy is ahead of other countries in recovering from the coronavirus pandemic, Pang said the likelihood of a “much larger sell-off in Chinese rates is much less than the rest of the world”.
As much as international interest in the Chinese bond market has grown, Pang said much of the investment is still in an “experience phase” as foreign investors still need to learn more about mainland China.