Focus: Allure of Chinese government bonds fades, economic recovery leads to foreign currency outflows | Reuters

HONG KONG (Reuters) – International investors are now reducing their holdings of Chinese sovereign bonds, once a safe investment during the coronavirus pandemic. It is a move to prepare for a rise in stock prices in anticipation of monetary tightening accompanying the resumption of China’s economy.

Chinese government bonds have been a solid return investment during the coronavirus pandemic, but international investors are now reducing their holdings. FILE PHOTO: Shanghai, China July 2017. REUTERS/Aly Song

Last year, while central banks around the world were competing to raise interest rates to fight inflation, China’s economy slowed due to the “zero corona” policy, and the People’s Bank of China (central bank) promoted monetary easing. providing exceptionally stable returns, even from a global perspective. But China’s economy is now reopening rapidly, and the People’s Bank of China is expected to roll back and ease over time.

Another reason why the attraction of Chinese government bonds has faded is that there are signs that the rise in market interest rates in developed countries has passed and capital gains can be expected.

Foreign investors sold about 616 billion yuan ($90.63 billion) in Chinese government bonds last year, according to data from Bond Connect, a mutual bond trading system between mainland China and Hong Kong, falling to about 3.4 trillion yuan.

That trend has intensified this year, say the managers of the fund.

“If you’re looking for a trade to take advantage of China’s economic recovery, CGBs are not the answer,” said Jason Pang, who manages the China Bond Opportunity Cheese Fund at JPMorgan Asset Management. , the answer is to buy Chinese bonds offshore and renminbi. “

Investors who have already put money into mainland China may switch to equities, Pan said.

For his part, he has reduced his investment in BGB and shifted most of it to “no amount” bonds, mainly yuan-denominated bonds traded in Hong Kong. It is based on the view that global investors betting on the recovery of China’s economy through Hong Kong stocks will increase the liquidity of the Hong Kong market and support dim sum bonds.

Over the past two years, the People’s Bank of China has bucked the trend of tightening global monetary policy by easing. As a result, Chinese government bonds have outperformed foreign government bond markets.

Last year, China’s FTSE government bond index returned 3.2% in yuan and -5.4% in dollars. In comparison, the FTSE World Government Bond Index is down 18.3% in dollar terms.

Essomund Goh, head of China bonds at British asset manager abrdn, said bonds from countries such as South Korea, India and Indonesia which are likely to cut interest rates soon are attractive. “There is more room for capital gains” than in Chinese government bonds, he said.

With US Treasury yields surpassing Chinese government bonds, the strength of Chinese government bonds has disappeared. Ten-year Treasuries currently yield around 3.7% and Chinese government bonds 2.9%. Shanghai stocks are up 13% in the past two months.

“Chinese bonds are very well diversified, especially over the last three years,” said Pan, who continued that it was reasonable to cast.

However, fund managers do not expect a huge sell-off of Chinese government bonds.

“China’s renminbi sovereign bonds are unlikely to experience significant volatility, both in terms of exchange rates and interest rates,” said Polina Kurdyavko, head of emerging markets and senior portfolio manager at Blu-ray Asset Management. “The People’s Bank of China is much better than other central banks at using administrative measures to redirect investment funds to where they are most needed,” he said.

Freddie Wong, head of Asia-Pacific fixed income at Invesco, sees some inflows into Chinese government bonds, particularly if the yuan appreciates.

(Reporter Zhen Summer)


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