China fixed income in charts
- Sized at USD 17 trillion, China’s onshore bond market is enormous and the second largest in the world after the US1
- Historically, China bonds have had low correlation with global bonds and with other credit markets.2 Overall China bonds can potentially offer diversification benefits and improve the yields of a global bond portfolio
- The China onshore bond market is about to embark on another milestone index inclusion with FTSE World Government Bond Index, presenting global investors with an opportunity to participate in the world’s second largest bond market
- There has been strong demand from foreign investors for China bonds: foreign inflows into China bonds have totaled USD 80 billion in the first seven months of 2021 versus USD 66 billion in the entire year of 2019.3 Positive fund flow dynamics should continue to support the RMB
- The China bond market is seeing greater credit differentiation, pointing to the increased importance of underlying credit fundamentals and bottom up credit selection
- The mainland Chinese government has been allowing market forces to play a bigger role in pricing risk. We believe that defaults will rise moderately in the China credit market, but that the authorities will avert systemic financial contagion
- China bonds are offering a yield premium versus other comparative markets. The stability of China bonds is also bolstered by lower levels of duration than other global bond markets2
China’s fixed income market
China bond market’s phenomenal growth
China’s onshore bond market has grown at a remarkable pace over the last decade and is today the second largest bond market in the world. China’s offshore USD bond market has similarly grown rapidly to reach USD 1 trillion in size. The last decade for the China bond market has been defined by transformative developments, including substantial progress on RMB internationalisation, the establishment of channels for foreign investor access, and the inclusion of domestic bonds in major global bond indices.
China bonds have low correlation to other credit markets and offer important diversification benefits
Integration in global markets
Global bond index inclusion has resulted in China being the third largest geographical allocation in a major bond index
China is the third largest geographical allocation within the widely tracked global bond index, Bloomberg Barclays Global Aggregate Index. This sizable allocation was made possible after Bloomberg Barclays included China onshore bonds into its indices for the first time. The inclusion was completed over a 20-month period between 2019-2020. Meanwhile, FTSE Russell is set to add China onshore bonds into its World Government Bond Index (WGBI) starting in November 2021, phased in over a 36-month period, in a move that is estimated to bring about USD 130 billion of flows into the market.
FTSE Russell’s China bond index inclusion set to begin in November 2021, further deepening integration
Strong onshore inflow trend
Foreign flows into onshore RMB assets rising with index inclusion
China onshore bonds attracted USD 80 billion in foreign inflows year-to-date (as of July), as compared to the USD 66 billion in the entire year of 2019. While foreign holdings of China bonds have grown since the start of the Bloomberg Barclays index inclusion, the overall foreign ownership rate of China bonds is only 3.5 per cent, which is extremely low when compared to other major bond markets.
Foreign ownership of China bonds is rising from a low level
CNY-USD exchange rate is relatively stable
China’s current account balance improved in 2020 amidst the pandemic induced disruptions and has contributed to the performance of the Chinese currency. The CNY-USD exchange rate is relatively stable and therefore the degree of currency risk a USD based investor takes would be manageable, especially when compared to other emerging market currencies. Positive fund flow dynamics should continue to support the RMB, while in the medium term, a more balanced current account and two-way fund flows can be expected.
RMB’s share of foreign currency reserve assets on the rise
The RMB makes up around 2.5 per cent of the world’s currency reserve assets. There has been a steady increase in the share of RMB in allocated reserves, a trend which is in direct contrast to the share of USD in allocated reserves, which has come down from 65.4 per cent at the end of 2016 to 59.5 per cent in Q1 2021. As China’s domestic capital markets continue to attract foreign inflows and with increasing integration of China’s financial markets, more assets globally are expected to be held in the Chinese currency.
Increased credit differentiation in China bonds
China onshore default rate is relatively low
We are seeing more pricing differentiation amongst China credit bonds, pointing to the importance of underlying fundamentals and bottom up credit selection. The default rate in the China onshore bond market has moved down since it touched a high in 2020; meanwhile the China offshore bond market’s occurrences of defaults are due to idiosyncratic events. Overall, we believe that defaults will rise moderately in the China credit market, but that the authorities will avert systemic financial contagion and that they have both the means and incentives to avoid a sharp and unmanageable spike in defaults.
Defaults expected to be manageable
China green bond issuance expected to grow
Green policies remain one of Mainland China’s priorities, and in 2020, President Xi announced China’s commitment to carbon neutrality by 2060. At the end of 2020, China was already the second largest issuer of green bonds, behind only the US; cumulatively, China has issued USD 130 billion of green bonds. Various initiatives to meet its commitments should result in an increase of green bond issuance. In terms of green bonds outstanding by currency, the RMB remains the third largest.
China’s property sector continues on a deleveraging trend
The performance of the China USD property high yield market has seen some ups and downs this year, caused by headlines and credit events on certain names. Despite the volatility, the property sector is supported by robust sales and property price growth. A tighter policy stance aimed at managing financial risk and deleveraging has also dampened investor sentiment. Still, because of the measures enforced on the sector – such as the three red lines policy – many property developers’ leverage levels have come down.
China fixed income offers a yield advantage over comparative markets
Valuations of China bonds are attractive
China bonds offer a yield premium versus other comparative markets – a benefit in a world of low rates, where 24 per cent of the Bloomberg Barclays Global Aggregate Index is comprised of negative yielding debt.16 The stability of China bonds is also bolstered by lower levels of duration as compared to other global bond markets.
China’s government bond yields generally trade at a premium versus similarly rated markets
HSBC Asset Management
China fixed income investment strategies
Choices for foreign investors in Chinese fixed income
Source: HSBC Asset Management, September 2021.
Why HSBC Asset Management?
HSBC Asset Management is a pioneer in Chinese investments, with deep experience in investing in both offshore and onshore Chinese securities.
Note: Representative overview of the investment process, which may differ by product, client mandate or market conditions.
China fixed income investment management recognised by industry awards
Awards issued by AsianInvestor, Benchmark and Asia Asset Management in 2021, based on data as of 31 December 2020. Asia Asset Management’s assessment was based on multiple factors including the candidate’s management of capturing existing inefficiencies in the market and long-term opportunities, amongst others. Benchmark’s awards are assessed on multiple facets of the portfolio – investment approach, portfolio management and risk management and stewardship. Within a fund category, the strategy with the second highest final score in its peer group wins the Outstanding Achiever Award. Asian investor awards were primarily based upon quantitative performance data and then qualitative assessments of each fund candidate's investment team, aims and strategy.
Note 1: Source: AsianBondsOnline, data as of June 2021.
Note 2: Source: Bloomberg, Markit, JPMorgan, data as of August 2021.
Note 3: Source: HSBC Global Research, central bank websites, August 2021.
Source: HSBC Asset Management, August 2021
Note 4: Source: AsianBondsOnline, data as of June 2021.
Note 5: Source: Bloomberg, Markit, JPMorgan, August 2021. Indices used are Markit iBoxx ALBI CNH Total Return, Markit iBoxx ALBI CNY Total Return, JACI China, Bloomberg Barclays Global Aggregate Index, Bloomberg Barclays US Aggregate Index, JPMorgan GBI-EM Global Comp, JPMorgan Asia Credit Index, ICE BofA US High Yield Index, JACI Non Investment Grade Index, Bloomberg Barclays US Treasury Index, ICE BofA Euro Government Index. Correlation calculated based on weekly performance data for the 3-year period ending 12 August 2021.
Note 6: Source: Bloomberg, data as of 12 August 2021.
Note 7: Source: FTSE Russell, March 2021.
Note 8: Source: FTSE Russell, July 2021.
Note 9: Source: HSBC Global Research, central bank websites, August 2021.
Note 10: Annualised volatility is based on weekly changes over the last 5 years. Source: Bloomberg, HSBC Asset Management, 20 August 2021.Note 11: Source: IMF, latest data available as of June 2021.
Note 12: Source: Wind, BofA Global Research, July 2021.
Note 13: LGFV refers to local government financing vehicle. Source: HSBC Global Research, August 2021.
Note 14: Source: HSBC Global Research, Dealogic, Bloomberg, July 2021.Note 15: Source: HSBC Global Research, June 2021.
Note 16: Source: Bloomberg, FTSE, Markit, JPMorgan as of 20 August 2021.
Note 17: Source: Bloomberg, as of 31 August 2021. Credit rating is presented as Moody's rating / S&P rating.
Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.
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