AllianzGI likes Chinese bonds as hunt for yield continues this year

PUBLISHED : Thursday, 18 January, 2018, 10:12pm
UPDATED : Thursday, 18 January, 2018, 10:50pm

Allianz Global Investors is considering buying Chinese sovereign bonds because the government’s efforts to curb excessive lending in the financial sector has pushed up interest rates and bond yields to attractive levels.

David Tan, Asia-Pacific chief investment officer for fixed income, cited the strength of the yuan as another favourable factor.

Unless there is a sharp spike in inflation expectations, the consensus is for the US Federal Reserve to raise interest rates three times this year, with Treasury yields staying below 3 per cent.

China’s 10-year government bond yield is stabilising at about 4 per cent after surging 85 basis points last year. That compares with yield returns on 10-year government bonds of just 2.61 per cent in the US, 0.03 per cent for Germany and 0.08 per cent for Japan.

“So the hunt for income will have to continue this year because yields remain low,” Tan said at a press conference in Hong Kong on Thursday. “Definitely we are looking at entry levels to buy Chinese bonds.”

Most foreigners have been investing in Asian markets through emerging market funds, which are under-represented despite it being the fastest growing region in the world. They would have missed out on substantial returns from investment grade countries such as Singapore and Korea, Tan said.

In terms of Chinese debt, Tan prefers the offshore dollar-denominated bonds which benefit from deep markets, especially sectors in real estate and commodities.

While the government aims to curb speculation in the property market, it does not want to kill it because it still wants people to own a house, Tan said. At the same time, the top 30 developers account for 40 per cent of the market after consolidation in the industry, so earnings for these companies remain high even though property prices have slowed.

The nation is fundamentally stronger than before and can combat potential economic weakness, he added.

Data released today showed the world’s second-largest economy grew by an annual 6.9 per cent in 2017, beating the government’s target of 6.5 per cent and last year’s growth rate of 6.7 per cent.

Additionally, Asian currencies may consolidate sideways this year, still supported by strong inflows because of the attractiveness of corporate earnings.

Andy Seaman, partner and CIO of Stratton Street, agrees that the impact of China’s crackdown on excessive lending that caused interest rates to rise also made the currency more attractive. The yuan has risen 1.3 per cent so far this year to 6.4237 against the dollar after last year’s appreciation of 6.4 per cent.

“If you think the interest rate in China is relatively high compared to the rest of the developed world, and the currency is going to appreciate, why wouldn’t you want to own Chinese bonds?” said Seaman.