Altaf's Perspective - Chinese Government Bonds

Speaker : Altaf Kassam

Happy New Year (Xīnnián kuàilè). Pardon me, please. For the poor pronunciation and a very belated happy Chinese new year to all those who celebrated. This time of year always takes me back to when we were a family in Hong Kong and our daughter, her again, was born. It was unseasonably cold, and I'll rush to the shops to buy a heater, to keep our newborn warm and a flat, which was only really set up for cooling and air conditioning. Now, even Chinese new year, last year seems like an age away now, and it was only

March, 2020 when the world health organization declared COVID 19, a global pandemic. March, 2020 was also a month I'll remember for its US treasury market dysfunction. And the global bond markets seemed on a course to derail central banks' attempts to ease financial conditions and get us through the pandemic until the Fed turned on the liquidity taps and saved us all. However, throughout that whole period, Chinese government bonds remained remarkably resilient at times trading even tighter than European government bonds.

And some of their previous negatives turned out to be positives. The lack of foreign investors meant they were more insulated from portfolio rebalancing and investor outflows and capital controls meant they didn't really get affected by the global dash for cash. Now that global bond market stability has thankfully returned, I still think Chinese government bonds are a must-own in any global multi-asset portfolio. For a start, they offer the correlation benefits that have really dwindled away from developed market government bonds, as their bond deals have remained pinned lower for longer. Um, Chinese government bonds still have a much lower and more stable correlation to developed market government bonds, developed market equities and even other emerging market government bonds.

And that's a phenomenon I think is going to stay for a while. They also have enviably high yields, both in nominal terms, but also stack up really well when adjusted for inflation in terms of real yields.

Again, something that's starting to become very absent from developed market government bonds. And finally, they have a tailwind from benchmark inclusion, which is driving in investor flows and keeping them extremely buoyant. So there's lots of reasons to be positive and why we would recommend owning Chinese government bonds, but at the same time, not everything in the garden is lovely. We know that top of investor's lists of concerns is often governance or ESG, but I do believe that the global
standardization of ESG norms will blow those cobwebs away.

So for me very much like our heater, which followed us back to London and kept me warm during the recent cold snap, I think Chinese government bonds are a must own part of the furniture for any multi-asset portfolio, which will keep our investments warm as the chill winds of risk aversion, blow through. With that, kung he fa choy and a very happy Chinese new year again.

Thank you.