More from this series
In this issue of ESLJ China Insights series, where we aim to explain the Chinese local bond market and its peculiarities, we are discussing the second of the four main segments that constitute the market, Central Government Bonds (CGBs).
Like the US Treasuries, CGBs are considered as risk-free sovereign bonds, carrying explicit central government guarantees. Relatively liquid, up to 50Y, they represent the second most actively traded segment after policy banks.
Because of their historically “default-free” nature, together with policy bank bonds, they are the only bonds included in global bond indexes and are preferred by foreign investors as they initiate their exposures to Chinese bonds.
In 2020, inflows into CGBs have tripled compared to the year before, amounting to about RMB566bn*, and it is still growing due in part to a robust post-Covid economic recovery and the recent inclusion of CGBs into major global bond indices, with the last confirmation being the inclusion in the FTSE World Government Bond Index from October 2021.
However, foreign participation in CGBs is still low, especially considering the size of the Chinese bond market (second in the world) and comparing it to other major government bonds, both in developed and emerging markets. As at the end of 2020, foreigners only own 9.7% of the CGB market, compared with over 30% in the US and 25% in Indonesia, for example**.
Despite foreign investors purchasing a net USD18.8 billion of Chinese government debt in January 2021 (the highest monthly inflows since data have been available), the CGB market is still immature and mostly contained onshore. Until recently, the largest Chinese debt issuers have been State Owned Enterprises (SOEs) and local governments, while issuance of CGBs has been modest. Whilst the situation is evolving and the central government is taking over more borrowing responsibilities, outstanding CGBs still represent less than 20% of China’s GDP, compared to outstanding U.S. Treasuries representing 100% of US GDP***.
Below we highlight some interesting characteristics of Chinese CGBs that make them potentially a compelling investment opportunity for foreign investors.
Attractive yields
Over the past 15 years, Chinese government bond have offered attractive yields compared to many developed markets.
Low correlation
Chinese government bonds have demonstrated low correlation to other bond markets and major asset classes. This is justified by the fact that China’s monetary policy has maintained an independent status from other major economies and its economic growth is little affected by what is going on in other countries.
Safe-have asset
CGBs have shown resilience in periods of market stress:
We are strong believers in the investment opportunities still to be unlocked in the Chinese bond market, however, because of the complexity of the system, operational hurdles and cultural and language barriers, it is paramount that investors partner with experts with on-the-ground expertise and a long-term consistent approach. In the next ESLJ China Insight, we will turn our attention to Local Government Bonds.
Sources:
* China Central Depository & Clearing as at March 2021
** AsianBondsOnline quarterly report, March 2021
*** Wind, July 2020
Disclosure
This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.
ESLJ-030621-I1
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