China Debt Emerges as Surprise Refuge in Global Bond Retreat

(Bloomberg) -- China’s debt challenges were so bad its economy was supposed to be on the infamous treadmill to hell. And many expected the country’s efforts to rein in financial leverage to undermine demand for bonds.

So it may come as some surprise that Chinese bonds are the top performers so far this year, among 70 markets in the Bloomberg Barclays Global Aggregate + China index, calculated in dollars. Other measures show the gain for yuan government and corporate debt, at nearly 2 percent, is almost a mirror image of U.S. bonds’ 1.6 percent drop.

While the rally in Chinese bonds -- spurred in part by authorities’ shift in recent weeks to support liquidity -- has eroded their yield premium, it’s also showcased the value of the securities as a diversification play. That’s all the more important as China increasingly opens up its $12 trillion bond market, the world’s third largest, to foreign investors.

China Debt Emerges as Surprise Refuge in Global Bond Retreat

"As the onshore market is now quite accessible, foreign inflows are likely" to keep pouring in, said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. "The narrowed China-U.S. yield differentials may not be a hindrance," given the diversification attraction, she said.

While U.S. Treasury yields have been climbing, thanks to prospects for further Federal Reserve interest-rate increases and concerns that inflation will finally pick up, in China, policy makers are signaling less-abrupt moves to address financial leverage. A gathering of the Communist Party’s Politburo this week highlighted the need to expand domestic demand, and press for the development of the nation’s financial markets. Stocks applauded Tuesday.

"Global investors are still keen to get involved even after the rally,” said Robert Subbaraman, Singapore-based head of emerging markets economics at Nomura Holding. "China is going to be a lot more stable" than other emerging markets, he said, as economies round the world cope with diminished monetary stimulus from developed-nation central banks.

Allianz Global Investors Singapore Ltd. and Neuberger Berman Group LLC are among those looking to bulk up their China holdings. Foreigners now hold 1.8 percent of the nation’s 75.9 trillion yuan debt, up from 1.6 percent at the end of last year.

China Debt Emerges as Surprise Refuge in Global Bond Retreat

Chinese notes in the Bloomberg index have climbed 6.2 percent this year, versus a gain of 4 percent in Japan’s bonds, the second-best performer in the gauge which measures dollar returns of investment grade notes in both developed and emerging markets. When removing the currency effect, Chinese debt is also the best performer, contributing positive returns to the index which registered a loss of 0.85 percent, data compiled by Bloomberg show.

“Overseas institutions became the biggest winner in China’s sovereign rally as they expanded their positions quickly since the third quarter,” said Shan Kun, Shanghai-based head of local markets strategy at BNP Paribas SA. “With more investors starting to pay attention to the market, we don’t expect them to slow their pace of purchase by much.”

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net, Yuling Yang in Beijing at yyang329@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Helen Sun, Yuling Yang