Q What does 2020 hold for Chinese bonds?
As we’ve said for some time now, China’s bonds are moving towards the mainstream. In 2019, this trend really began to accelerate, with news of the inclusion of onshore Chinese bonds into major global indices a key milestone.
We think February 2020 will be another pivotal point; that’s when liquid CNY-denominated Chinese government bonds will start to be included in the flagship JP Morgan EM suite of bond indices. We expect this to act like an injection of fuel into the asset class’ journey to the investment mainstream.
Q Just because they can more easily invest in Chinese bonds, why would investors want to?
We think in 2020 investors will become even more aware of the relevance of Chinese bonds for their portfolios.
We live in a world of negative or low yields and in 2020 it’s likely this phenomenon will persist. Chinese bonds are one of the few asset classes providing positive yield. An increasing number of our clients have become aware of this and we think that it is becoming harder for the investment community at large to ignore.
Chinese government bonds offer a significant yield pick-up over the equivalent bonds on offer in Europe and the US. In our strategy, we aim to bring the benefits of this to our investors, while also selectively taking advantage of the opening up of China’s onshore bond market, which provides compelling yield propositions.
Q How different are Chinese bonds to other asset classes?
We think Chinese bonds’ low volatility and low correlation to other asset classes make this something of a holy grail in the investment world – given its potential to lower the overall risk in an investor’s portfolio while increasing return. And we think investors’ awareness of the portfolio diversification benefits of this distinctive asset class will only rise in 2020.
Q What about trade war-related risk?
The biggest risk we see for 2020 and beyond – a worst-case scenario – is that tensions between the US and China escalate, resulting in a fully-fledged trade war that then snowballs into some form of capital market protectionism, reversing many of the benefits of globalisation. We view this risk as remote and it would hit all asset classes, not just Chinese bonds.
What’s particularly relevant to investors is the effect the trade war is having on China – effectively encouraging it to reinvent itself and engage more with the rest of the world. We’re seeing China opening up its capital markets to foreigners, adopting international standards and embracing competition. All on China’s terms and to its own timetable, but the desire to get a seat at the global table is clear. What is labelled an emerging market is looking more and more like a developed market and investors’ perceptions have yet to catch up.
Q What should investors make of China’s slowing growth rate?
While China’s rate of growth is slowing, it remains the envy of most developed economies. Crucially, we think the Chinese authorities’ response to it speaks of a long-term vision, which is a positive for a sustainable – albeit slower than in recent history – growth path for the country. Thankfully, China is not succumbing to the temptation of a quick sugar fix in the form of major monetary policy easing. Instead (and in no small part spurred on by a combative US), China has been turning its attention towards getting its own house in order: becoming fitter and leaner and further strengthening its balance sheet. We’re seeing a raft of financial regulation, plus deleveraging and supply-side reforms.
Q What will you be focusing on in 2020?
We will continue to look beyond the headlines to view the asset class for what it really offers: high-quality yield underpinned by a solid fundamental story and with relatively low volatility. We’ll continue to take a selective approach with the aim of bringing the very best of what the asset class has to offer investors, exploring the broadening and deepening opportunity set.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss.