Global funds seen adding to US$386 billion of ownership in Chinese government bonds as returns outpace Treasuries

Name: What is China’s 6th plenum and why is it important?
Uploaded: 2022-01-21T09:31:42.000Z
Duration: 4 min 6 s
Description: What is China’s 6th plenum and why is it important?

China central bank’s easing stance bodes well for yuan sovereign bonds’ performance amid a sell-off in Treasuries

Foreign investors own just US$386 billion of onshore government bonds, and their higher yields relative to US will continue to drum up their appeal

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People walk past the headquarters of the People’s Bank of China in Beijing. Photo: Reuters

Georgina Lee

Published: 5:31pm, 21 Jan 2022Updated: 6:34pm, 21 Jan 2022

Chinese government bonds are likely to attract stronger fund inflows as the central bank pushes interest rates lower just as policymakers in the US and elsewhere prepare to dial back their monetary stimulus, investment bankers said.

The People’s Bank of China this week trimmed its key lending rate for the second time in a month as the economy lost momentum in the final quarter of 2021, fanning a rally in sovereign debt and stocks at home. That move has entrenched expectations for more easing, while the Federal Reserve signalled an opposite tightening path.

Lured by a yield advantage over US Treasuries and German Bund, global funds soaked up 513.7 billion yuan (US$81 billion) of yuan-denominated government bonds last year through November, according to data compiled by Bloomberg and China Central Depositary & Clearing. That trend has added to their still-tiny 2.8 per cent or US$386 billion ownership in the world’s second-largest debt market.

Federal Reserve Chairman Jerome Powell and his FOMC members are plotting to dial back bond purchases, stoking a sell-off in Treasuries. Photo Reuters

“We see a rising probability of lower rates this year” given recent official statements signalling such intent, said Freddy Wong, head of Asia-Pacific fixed income in Hong Kong at Invesco, which manages US$1.5 trillion of assets. “As such, we continue to like onshore bonds.”

Chinese government bonds have returned 3 per cent in the past six months, while US Treasuries lost 3.2 per cent as policy expectations diverged, according to ICE BofA Indexes. Euro-area government bonds fell 2.8 per cent.

Ten-year Treasury yields rose to as high as 1.9 per cent this month, a level not seen since December 2019, according to Bloomberg data, after minutes from a previous meeting suggested the Federal Reserve is plotting a faster than expected withdrawal of stimulus, with three rate increases in 2022. Chinese government bonds yielded 2.73 per cent recently.

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What is China’s 6th plenum and why is it important?

“Compared with overseas bonds, which not only have relatively lower [yields] but also face the risk of falling prices driven by rising interest rates, the returns of Chinese government bonds will remain attractive,” said Zhang Xing, Hong Kong head of fixed income, investment banking department, at China International Capital Corp.