Insights   •   Fixed Income

Chinese Bonds: Enhancing a European Fixed Income Portfolio

Head of Strategy & Research, APAC

Improved access for foreign investors to China’s large bond market has started a conversation around the place of Chinese bonds within a global portfolio. Investors are now evaluating whether to make an allocation and, if they do, what level of investment that should be. In the current low yield environment, Chinese bonds represent an attractive yield pick-up opportunity1 while also offering good diversification benefits,* particularly for Europe-based investors. The ultra-low or even negative yields on offer in Europe and the low correlation of Chinese bonds to European bond returns are key factors in the decision mix.

Investors considering strategic allocations also need to take qualitative factors into account, such as credit risk, the level of market development, access and operational differences. Furthermore, the potential differences in liquidity versus more developed bond markets should also be borne in mind when deliberating on an allocation to Chinese bonds. On this basis, we believe that while there is a strong case for foreign investors to allocate to China’s bond market, building such an allocation should be done gradually.

  • Diversification Benefits Chinese bonds are lowly correlated with European bonds and therefore provide relatively attractive diversification benefits for European investors.
  • Yield Enhancement Chinese bonds offer relatively attractive yield enhancement relative to European government and investment grade credit fixed income assets.
  • Higher Volatility Chinese bonds could have potential higher volatility driven by currency movements.
  • Less Liquid, Less Mature Investors should be mindful of the potential for lower liquidity in China bonds, while also noting the developing and improving dynamics and structure of China’s fixed income markets.