Having recently lowered its barriers to entry, China’s 17-trillion-dollar bond market* has become too big for investors to ignore. As the world’s second largest economy, China is a major global player and is on a significant trajectory of growth. Yet, despite the size and growth of the market, China is currently under-owned, with foreign investor participation accounting for just over 2% of the entire bond market*. In fact, China offers emerging market like returns for developed market levels of risk.
* Source: Eurizon SLJ Capital & WIND as at 31/12/2020
Emerging markets returns with developed markets risk
The Chinese market has recently opened-up to foreign investors, which has, in our view, been the single most important change made to global financial markets since the introduction of the Euro. Bonds are viewed as a save haven in times of market stress and in particular Chinese Bonds have fared remarkably well. This is a market that is too important for investors to ignore.
1. Attractive yields
(Tab 1) China onshore (RMB) bonds offer an attractive yield, relative to developed markets. Occupying the space between emerging and developed markets, RMB bonds offer an alternative source of yield for income investors.
2. Robust historical returns
(Tab 2) The RMB bond market has demonstrated emerging market style returns, outperforming global bond indices and developed markets such as the UK.
Past performance is no guarantee of future returns. Income from investments is variable and not guaranteed.
3. Safe haven
(Tab 3) The RMB bond market has behaved as a safe-haven during times of market stress. At the same time the lower volatility, relative to emerging markets, has helped improve the risk reward characteristics of emerging market indices.
4. Low correlation and
(Tab 4) Over the last 15 years, RMB bonds have outperformed emerging market debt, global bonds and UK gilts on a risk adjusted basis.
The second largest bond market in the world
The opportunity is now
- With over USD 17 trillion* (as at 31/01/2021), the Chinese market is the second biggest bond and equity market worldwide, and on a significant trajectory of growth.
- Yet, China is currently under-owned, with foreign investor participation accounting for only 3% of the entire bond market.
- China has recently been opening to foreign investors with key policies and reforms, and the recent inclusion of Chinese bonds into global indices will bring even larger inflows, forecasted to reach USD 2 trillion in 5 years.
- However, even though China’s share in global indices is rising, the imbalance between market size and index weight will persist, making the case for an active allocation into China bond market even more compelling.
*Source: WIND & Eurizon SLJ Capital
Figures are shown in (USD)
Past performance is no guarantee of future returns
Sources: Bond Market size - BIS Q2 2020
Nominal GDP, PP Adjusted GDP and Annual Growth % - The World Bank, as of 31/12/2019
Local expertise with a global perspective
The right investment manager
Our RMB bond portfolio managers are all Chinese native, fluent in Mandarin and have studied and now live in the West. We believe this represents a double strategic advantage, not only in accessing local language information and intel, understanding the local cultural nuances and policy decisions, but also in gaining a better understanding of the global economy and the global context in which to think about China.
Macro research is at the heart of our company culture and investment process. Our top-down discretional investment approach is based on our understanding of the peculiarities of the Chinese economy and its increasing relevance in determining global economic and political trends.
Team experience: Percentage of time spend living or working in region
Sources: Eurizon SLJ Capital Ltd, as of 01/02/2021
We believe that our research-led active management approach offers the best opportunity to exploit inefficiencies inherent within emerging, currency and fixed income markets with the potential to add incremental value in a risk-aware manner.
Explore the sections below to read a sample of our insights:
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Past performance is no guarantee of future performance. The value of the investment and the resulting return are subject to fluctuations, may increase as well as decrease and, at the time of redemption, the investor may not get back the financial investment.
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