Global investors are losing their appetite for Chinese government debt

By Summer Zhen

HONG KONG, Feb 13 (Reuters) – Global investors are reducing their holdings of Chinese government bonds, a consistent source of safe returns during pandemic years, as they brace for monetary tightening in China and explore stock markets juicier in the reopened economy.

The Chinese bond market was the exception in 2022, when global central banks hastily hiked rates to fight inflation at a time when policymakers in Beijing faced a sharp COVID-induced slowdown. But now, with the economy rapidly reopening, analysts expect the People’s Bank of China to eventually end the stimulus.

Signs of soaring developed market rates are another reason why Chinese bonds, which yield around 3% on 10-year investments, look less attractive, given higher potential capital gains elsewhere.

Data from China’s Bond Connect platform, the primary way for foreigners to invest in mainland Chinese markets, shows foreigners sold about 616 billion yuan ($90.63 billion) in bonds in 2022, reducing its holdings to 3.4 trillion yuan.

This trend has strengthened this year, according to fund managers.

“If investors say they want to trade China’s recovery, the answer is not China government bonds (CGBs). The answer to participate in bond risk opportunities would be Chinese offshore credit and long positions. on the renminbi,” said Jason Pang, a portfolio. manager of the China Bond Opportunities Fund at JP Morgan Asset Management.

Investors who have already committed cash to mainland markets could switch to equities, he says.

Pang says he partially reduced his exposure to CGBs and reallocated much of it to yuan-denominated dim sum bonds for international markets (CNH) in Hong Kong. According to him, as global investors participate in China’s recovery through securities in Hong Kong, liquidity conditions in the city will improve and put a floor under these bonds.

Contrary to the global tightening trend, China has eased its monetary policy over the past two years. This helped its bond market outperform its peers.

The FTSE Chinese Government Bond Index returned 3.2% in 2022 in local currency and a negative return of 5.4% in USD. The FTSE World Government Bond Index lost 18.3% in dollar terms.

THE REDUCED YIELD ADVANTAGE

The cushion of higher CGB yields also evaporated, with US yields first catching up and then overtaking those in China. Treasuries now offer around 3.7% over 10 years, while the Chinese equivalent is 2.9%. Meanwhile, the Shanghai stock market is up 13% in just over two months.

“Chinese bonds have been a great way to diversify, especially over the past three years,” Pang says. But now that global interest rates have risen, it makes sense to invest limited cash in more rewarding markets.

Yet, as fund managers look to more attractive markets, they don’t expect a massive sell-off from CGB.

($1 = 6.7969 Chinese yuan renminbi)

(Reporting by Summer Zhen; Additional reporting by Rae Wee in Singapore; Editing by Vidya Ranganathan and Kim Coghill, Spanish editing by José Muñoz in the Gdansk newsroom)