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China onshore bonds go mainstream

Inclusion in Bloomberg Barclays Global Aggregate Index marks tipping point, according to HSBC’s Gregory Suen

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David Robinson

This week, for the first time in history, one of the most followed global bond indices will contain Chinese government and high-quality renminbi bonds

“This long-awaited inclusion is about to change the way China bonds are represented, marking not only China’s debut in the global bond markets but also a tipping point for global fixed income investing,” said Gregory Suen, Investment Director, Fixed Income at HSBC Global Asset Management.

Suen said there was a perception that investing in China can be risky, but this perception is contradicted with China onshore bonds, which have the potential to enhance yields, offer diversification, improve returns and lower volatility of a global bond portfolio, he said.

“Diversification is the silver bullet argument for investing in RMB bonds, as they are largely driven by domestic policies and onshore supply and demand, and do not necessarily coincide with the rest of the world. Investing in Chinese assets can also help capture distinct investment opportunities, particularly as China is in a unique economic development stage,” Suen said.

Higher yields

Suen said China onshore bonds offer global investors a meaningfully higher yield than other major markets.

“China’s 10-year government bond yields are trading at about 70bp higher than the US, 210bp higher than the UK and 270bp higher than France. When compared to markets of similar credit rating, China trades at 240bp above Ireland and 311bp above Japan,” he said.

“Macro fundamentals are also supportive of the RMB bond market, given economic growth is slowing and inflation has remained soft. These factors have allowed authorities to keep a relatively loose monetary policy bias and keep ample market liquidity, especially as deleveraging is not the main priority of the government.

“Index inclusion is expected to play a significant role in China’s broader programme to open up its financial markets, as it would attract higher foreign participation in China’s bond market and advance RMB internationalisation. We have already seen foreign investors increase their holdings of onshore bonds in 2018 by US$65bn to US$248bn, and we anticipate foreign participation will rise further in the coming months.”

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