Chinese bonds have big US fund ready to take a nibble – The Australian Financial Review

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Chinese bonds proved a great diversification play last year, advancing steadily while many markets saw losses – reflecting the People’s Bank of China’s shift toward stimulus mode in contrast to tightening by the United States Federal Reserve. Foreign investors tend to prefer government and so-called policy-bank securities, issued by key state-owned lenders. Credit is more exposed to accounting-transparency issues and defaults.

Mr Murphy spoke days after Bloomberg LP said Chinese local-currency bonds would be added to the Bloomberg Barclays Global Aggregate Index on a phased basis from April. Bloomberg LP is also the parent of Bloomberg News. Market participants anticipate other key index providers will also incorporate Chinese debt in time.

Chinese bonds have much less liquidity than major peers, which has given some investors pause. Goldman Sachs Group estimates turnover for government bonds was 1.3 times last year, based on annualised data from January to September. Treasuries turned over 4.6 times, while South Korean bonds came in at 3.4 times, Goldman analysts tallied.

Bond connect

China’s move in 2017 to allow investments via the Hong Kong Bond Connect made it easier for foreign investors to access the market, although logistics and a relative lack of hedging tools are concerns.

However, in December Goldman’s Kenneth Ho anticipated some $1 trillion in foreign inflows to the end of 2022. That would bring overseas ownership to about 6 per cent of the total outstanding, from little more than 2 per cent today, Mr Ho wrote in a report.

One key dynamic that may affect flows is China’s exchange rate. The yuan’s appreciation in 2017 and early last year helped bolster foreign investor confidence. After a trade-tension-induced slump in mid-2018, the currency has been on more solid ground.

For his part, Mr Murphy in his global portfolio will seek to pare back on risk during what he sees as a six- to nine-month window of stability before a likely resumption of US Federal Reserve rate rises. That could mean selling triple-B-rated corporate debt and buying single-A or double-As, or favouring government bonds over credit, he said.