China's Bonds Defy Global Trends Amidst Foreign Ownership Concerns

Key Takeaway

• Chinese sovereign bonds outperform amidst global debt selloff, with a 23 basis point drop in yield vs. US Treasuries' 78 basis point rise.
• Foreign ownership of China's government debt nears a five-year low at 7.5%, amid widening yield gaps and geopolitical concerns.
• Investors reassess positions in Chinese bonds due to global market shifts, yet long-term outlook remains favorable for Asian equities including China.

China's Bonds Defy Global Trends

China's sovereign bonds have shown resilience amidst a global debt market rout, with the nation's benchmark 10-year yield decreasing by approximately 23 basis points this year. In contrast, similar-maturity US Treasury yields have seen a significant increase of 78 basis points. This divergence is attributed to China's unique economic cycle, where the central bank is easing policy to bolster growth, unlike the global trend of maintaining high interest rates to combat inflation. Edmund Goh, investment director of Asia fixed income at abrdn Plc, highlighted the appeal of China's market amidst volatility elsewhere, stating, "We still think it’s a good market to bet on China’s structural slowdown."

Divergence and Foreign Ownership

The gap between US and Chinese 10-year yields has widened to more than 230 basis points, marking a near two-decade high. This divergence is further amplified by a decrease in foreign ownership of China’s government debt, which fell to 7.5% at the end of March, nearing its lowest level since 2018. The reduction in foreign investment is partly due to concerns over geopolitical tensions, underscoring the unique position of Chinese bonds in the global market.

Reassessment of Investment Strategies

Despite the attractiveness of Chinese bonds due to their low correlation with global debt, some investors are reconsidering their positions. Jason Pang, Asia foreign-exchange and rates portfolio manager at JPMorgan Asset Management, mentioned the diminishing appeal of adding to China government bond positions given the corrections seen in US Treasuries. This sentiment reflects a broader reassessment among investors, with some looking towards reallocating investments to capture value in other markets, including US Treasuries and other Asian rates markets.

Long-term Outlook and Global Equity Shifts

Goldman Sachs Group Inc. analysts, including Xinquan Chen, anticipate that Chinese bond yields will remain relatively low in the long term, despite potential short-term increases guided by the People’s Bank of China. This outlook is based on factors such as weak credit demand and efforts to address local government debt risks. Meanwhile, the broader Asian equity market is adjusting to a higher-for-longer interest rate environment, with investors shifting focus towards sectors and regions with growth potential, such as Chinese and Hong Kong equities, Japanese financials, and the South Korean chip sector. This shift is driven by various factors, including corporate reforms, attractive valuations, and domestic consumption stories in markets like India.

Street Views

• Edmund Goh, abrdn Plc (Bullish on China's sovereign bonds):

  "Most foreign managers will be tempted by Treasury yields at this moment, however, if you factor in the volatility in these markets, I think China makes a lot of sense. We still think it’s a good market to bet on China’s structural slowdown."

• Jason Pang, JPMorgan Asset Management (Neutral on China's government bonds):

  "Given the extent of the correction seen in US Treasuries, it is becoming less compelling to add further to China government bond positions... We are considering a reallocation of China government bonds into US Treasuries or other Asian rates markets to capture value creation."

• Goldman Sachs Analysts including Xinquan Chen (Bullish on Chinese bonds long-term outlook):

  "The PBOC may guide bond yields to move higher gradually amid the issuance of ultra-long-term central government special bonds and further growth recovery, but a shift of the policy stance into tightening mode remains unlikely... For the long-term, we expect interest rates to remain low, given weak credit demand amid the prolonged property downturn and the ongoing, likely multi-year efforts to address local government debt risks."