Chinese government bonds are offering increasing opportunity for foreign investors seeking a haven from the trade war storm, portfolio managers said.
The tariff fight between Washington and Beijing has scored a direct hit on China’s stock markets and yuan currency, which have both fallen sharply this year.
But steps China is taking to increase access for foreign investors to its less-tariff-vulnerable government debt, combined with some timely technical factors, is making for an attractive option, investors say.
Opportunity, according to Jason Pang, a portfolio manager at J.P. Morgan Asset Management in Hong Kong, lies in several factors.
According to Pang, China’s bonds outperformed other Asian currency sovereign debt in the first six months of 2018 as domestic investors sought safety amid turmoil in stocks.
And while overall foreign holdings of government debt is about 7 percent, low compared with other countries, outsiders have been increasingly jumping on board as seen in government bonds attracting net inflows of foreign cash even as investors have fled equities.
A key attraction for foreigners, Pang said, has been cheaper costs for hedging — or insurance against currency risk which protects, for example, U.S. dollar investors buying bonds denominated in the Chinese yuan.
And Pang and other investors said China’s bond market is also in vogue because it is less correlated with other markets, meaning it doesn’t automatically move in lock step in times of turmoil.
“Because you have very low foreign representation in it, the country itself actually is less susceptible to foreign investment outflows, for bonds, in particular,” Pang said.
Erwin Sanft, managing director and senior portfolio manager for international investment at E Fund Management in Hong Kong, said that the Chinese bond market’s lack of overall scale also provides some immunization from trade tensions.
“The trade conflict impacts on the currency but in terms of direct impact on the bond market, very little, because the bond market has yet to really encompass the whole economy,” he said, citing, for example, the lack so far of riskier debt instruments such as junk bonds.
The world’s second-largest economy has been allowing more outside participation through a “connect” program with Hong Kong that allows purchases through the former British colony, now a semi-autonomous Chinese region.
The last technical hurdles for inclusion next year of Chinese government bonds into the Bloomberg-Barclays Global Aggregate Index, a key benchmark, have been cleared and that is also expected to increase foreign investment through the connect program.
China announced last week the approval of a trading measure necessary for portfolio managers to simultaneously deal on behalf of more than one fund and waived for three years tax on interest income on domestic bond investments by foreigners.