As global investors anticipate a monetary tightening in China and anticipate the reopening of the economy, they are lowering their holdings of Chinese government bonds and eyeing more lucrative stock markets in the reopened economy, Reuters reported.
According to data from China's Bond Connect platform, the principal channel for foreign investment in mainland markets, foreigners sold approximately $90.63 billion worth of bonds in 2022, reducing their holdings to $3.4 trillion.
This year, this trend has strengthened, according to investment managers.
"If investors are saying that I want to trade the China recovery, the answer is not Chinese government bonds (CGBs). The answer to participating in risk-on opportunities in bonds would be Chinese offshore credit and long renminbi," Jason Pang, portfolio manager of the China Bond Opportunities Fund at J.P Morgan Asset Management, said.
He noted that investors who have already invested in mainland markets may transfer to equities.
China's bond market was an outlier in 2022, as global central banks rushed to boost interest rates to combat inflation, while Beijing faced a steep COVID-induced downturn. Analysts anticipate the People's Bank of China will eventually reduce stimulus now that the economy is rapidly recovering.
In light of the potential for bigger capital returns abroad, signs of a rate peak in developed markets are another reason why China's 10-year bonds, which offer a yield of about 3%, are less attractive.
Pang stated that he has partially decreased his exposure to CGBs and moved a substantial portion of that into offshore yuan (CNH) denominated Hong Kong dim sum bonds. As global investors speculate on China's recovery through Hong Kong equities, he predicts that cash conditions in the city would improve, putting a floor under those bonds.
In contrast to the worldwide trend of monetary policy tightening, China has eased monetary policy over the previous two years. Thus, its bond market has outperformed its counterparts.
In 2022, the FTSE Xinhua Chinese Government Bond Index generated a return of 3.2% in local currency terms and -5.4% in USD terms. In dollar terms, the FTSE World Government Bond Index fell 18.3%.
As U.S. yields first caught up and then surpassed China's, the cushion of higher yields in CGBs has also disappeared. Treasuries currently offer approximately 3.7% on 10-year maturities, while China's equivalent yields 2.9%. In the meantime, the Shanghai stock exchange has gained 13% in just over two months.
In particular, over the past three years, China bonds have been an excellent diversifier, according to Pang. But as global interest rates reached a peak, he argued it made sense to invest limited funds in higher-yielding markets.
