Goldman Says U.S. Investors Warming to Chinese Bond Market

(Bloomberg) -- U.S. investor interest in China’s bonds has seen a “notable improvement” as the market is being steadily opened up to foreigners, according to Goldman Sachs Group Inc.

The launch of Bond Connect in July last year, coupled with China’s inclusion in the Bloomberg Barclays Global Aggregate Index from April next year, has served to pique their interest over the last 12 months, Goldman analysts Danny Suwanapruti and Andrew Tilton wrote in a note Wednesday, following a visit to meet U.S. institutional investors.

“The feedback during last week’s trip is that, although it could still be a few years away before China is included into all three major global bond indices; most investors agree it really is just a matter of time,” they said. “Several investors that we spoke with are in the process of setting up accounts and have shown significantly increased levels of interest in China’s bond market.”

Goldman Says U.S. Investors Warming to Chinese Bond Market

Inclusion in global bond indexes such as Bloomberg Barclays, JPMorgan Chase & Co. and Citigroup Inc. is expected to increase the importance of the Chinese fixed-income market to foreign investors. Goldman expects the market to almost double in size within the next four years and sees foreigners owning around 22 percent of all Chinese government bonds by the end of 2022, equivalent to about $900 billion.

While investors appeared more eager to get a foothold in the nascent market, there were concerns about whether its prominence could drain liquidity from other emerging markets, in particular as it may come at a time key global central banks are becoming less accommodative, according to the strategists.

“Given the notion that core yields are moving higher and China’s fixed income markets are emerging as a new asset class compounded some investor concerns over the potential pull out of EM local currency fixed income markets over the coming years,” Suwanapruti and Tilton said.

Meanwhile, U.S. investors expected the Chinese yuan to drift sideways in the near term as authorities don’t want the currency to strengthen much further, nor do they favor a sharp depreciation that may be “mistakenly construed as retaliation on trade wars,” the analysts wrote.

©2018 Bloomberg L.P.