As the Chinese economy reopens post-COVID, global investors are moving away from Chinese government bonds, which were a dependable source of secure returns in the pandemic years. With the People’s Bank of China expected to rein in stimulus and signs of a peak in developed market rates, China’s bonds yielding around 3% on 10-year investments are becoming less attractive to investors in comparison to the potential for greater capital gains elsewhere.
Data from China Bond Connect platform, which serves as the primary channel for foreign investment in mainland markets, showed foreigners sold around 616 billion yuan ($90.63 billion) worth of bonds in 2022, bringing their total holdings down to 3.4 trillion yuan.
Investment advisor Pang noted that some investors who have already committed to mainland markets may opt to switch to equities instead. Pang himself has partially reduced his exposure to Chinese government bonds and reallocated a portion into offshore yuan-denominated bonds in Hong Kong.
Despite the shift from bonds to equities, fund managers don’t expect a massive selloff of Chinese government bonds. They anticipate that the ease in monetary policy by the Chinese government over the past two years will still benefit the bond market, although the advantage of higher yields in CGBs has diminished as U.S. yields have overtaken China’s.
As the global trend leans towards tightening, Edmund Goh, head of fixed income for China at British asset manager abrdn, favours countries that are poised to exit higher interest rates such as South Korea, India, and Indonesia. This view is shared by Jerome Broustra, head of investment specialists, fixed income and multi-asset solutions, core investments, at AXA Investment Managers, who is investing in Indonesian sovereign bonds and infrastructure-related offshore China high yield bonds.
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