Global benchmark indexes embrace Chinese bonds which were historically overlooked

17 Aug, 2020 19:44
source: Singularity Financial

Singularity Financial Hong Kong August 17, 2020 – The pressure to invest in Chinese debt has intensified among global bond buyers, in part, because of its strong performance relative to other debt markets.

Debt from the world’s second largest economy historically has been overlooked by foreign investors as it’s closed capital markets prevented outside money managers from taking funds in and out of the country at will.

But Chinese bonds have been forcing their way slowly into the holdings of overseas funds based in New York or in London, thanks in large part to recent initiatives by Beijing to open up its financial markets to the outside world and its resulting inclusion into passive investing indexes – which carry significant sway over how, and where, portfolio managers allocate their cash.

“In years gone by, China might have been an interesting story, and it might have been something you were curious about. But it didn’t need to be assessed that seriously,” said Jonathan Orr, a portfolio manager at Goldman Sachs Asset Management.

But this view has waned among overseas investors who increasingly realize that the decision to avoid China’s bond market could leave them at risk of under-performing their competing indexes and their peers.

Now global investors are overcoming their long aversion to China’s bond market and taking up a larger share of global benchmark bond indexes.

Orr estimates that another $250 billion of inflows could arrive into China’s bond market due to their recent inclusion into the three major indexes provided by JP Morgan, FTSE Russell and Bloomberg.

Foreign inflows to Chinese bonds reached an all-time high in the second quarter of $33.5 billion. And in July, inflows reached $20 billion alone, its highest month on record, according to Exante Data, which tracks the movement of capital across the world.

Chinese bonds now represent 5.3% of the Bloomberg Global Aggregate Bond Index and 9.4% for JP Morgan’s emerging market bond index.

In a yield-starved world, China’s government bonds offer the richest income in comparison to other developed debt markets, said Alex Etra, a senior strategist at Exante Data.

Even as the Federal Reserve cut interest rates to rock-bottom this year, the People’s Bank of China only trimmed its benchmark loan prime rate to 3.85% from 4.15% at the start of 2020.