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 for Australian investors given the low correlation of Chinese bonds to Australian and global bond returns.
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.
1 Source: Bloomberg Finance L.P., as of 20 September 2021