Bonds find favor as hedging strategy

The rising interest in Chinese bonds among overseas institutions reflects the asset's value in hedging risk and, more importantly, investor confidence in the nation's economic recovery, experts said on Thursday.

style="text-align: left; margin-bottom: 15px;">According to the People's Bank of China, the country's central bank, net purchases of Chinese bonds by foreign institutional investors exceeded 200 billion yuan ($28 billion) in October, the ninth consecutive month of such net capital inflow this year.

Foreign institutions' net purchases of Chinese bonds have exceeded 1 trillion yuan so far this year, with their increased holdings estimated to have touched 250 billion yuan in November. They have sped up investments in Chinese bonds in the third quarter, PBOC said.

As of the end of October, a total of 1,110 overseas institutions from 70 countries and regions had entered China's bond market, with an average of about 100 new entrants per year since 2017, PBOC said.

To date, the total value of Chinese bonds held by foreign institutions was 3.3 trillion yuan, up nearly 200 percent from the end of 2017.

Volatility in Chinese government bond yields has been relatively lower and the two-way fluctuation of the renminbi exchange rate has become normalized. These have helped to stabilize the expected returns of yuan-denominated bonds, reflecting their hedging value, said Yu Lifeng, senior analyst of Golden Credit Ratings.

Meanwhile, the addition of yuan-denominated bonds in foreign investors' portfolios can help them diversify risks and increase returns. This can be attributed to the different economic cycles between China and major foreign economies, as well as the RMB bonds' lower correlation with those issued by developed countries or emerging economies, said Yu.

Wen Bin, chief economist of China Minsheng Bank, said the United States is showing noticeable signs of an economic slowdown. The inverted interest rate structure between China and the United States is narrowing significantly, enhancing the appeal of onshore yuan-denominated bonds.

As the yuan is likely to appreciate steadily amid a contraction in inverted interest rates, the Chinese bond market will become increasingly attractive to foreign investors. Investment channels will also be further optimized due to China's ongoing financial market opening-up, said Wen.

More important, overseas institutions' net purchase of Chinese bonds has reflected the increased positive factors in China's economic fundamentals and foreign investors' mounting confidence in China's economic outlook, Wen added.

Last month, the International Monetary Fund raised its estimate for China's 2023 GDP growth to 5.4 percent from 5 percent. Its forecast for China's GDP growth next year has also been raised to 4.6 percent from 4.2 percent.

CITIC Securities' chief economist Ming Ming said foreign institutions' continued net purchase of Chinese bonds reflects their confidence in China's sovereign credit and the country's economic turnaround.

Chinese bonds have served as valuable hedging assets, especially among emerging economies, when complexities have been piling up in the external market. China has always adopted stable and sustainable macro policies, which have helped to push the value of RMB assets. Infrastructure arrangements such as the Bond Connect program have made investment in Chinese bonds easier for foreign institutions, Ming said.

Since April 2019, Chinese bonds have been included in all the three major global bond indexes — Bloomberg Barclays Global Aggregate Index, JPMorgan Government Bond Index Emerging Markets Global Core Index, and FTSE World Government Bond Index.