Why Chinese government bonds are crucial Why Chinese government bonds are crucial Why Chinese government bonds are crucial

Why Chinese government bonds are crucial

Bonds 5 minutes to read
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The moment for which many people have been waiting is finally here: Saxo Bank is releasing Bond Connect.

The Saxo platform will give institutional clients the opportunity to trade Chinese onshore government bonds, central bank paper and much more, putting clients in direct contact with counterparties providing liquidity on Bond Connect. 

This means that Saxo Bank’s institutional clients will be able to access a market long closed to foreign investors, as well as one that is destined to see activity increase dramatically as international investors come to understand the importance of the Chinese bond market, and Chinese government bonds in particular.

Chinese government bonds were one of 2018’s best-performing sovereigns. The yield on the 10-year CGB has plummeted from 3.9% at the beginning of 2018 to near 3% at the beginning of 2019, amid December’s equity sell-off, tighter global financial conditions, and rising political uncertainty due to the Sino-US trade war, among other factors.

The behavior of CGBs throughout last year demonstrates that these sovereigns are assuming a safe-haven role. In a period where we believe that volatility is going to rise as we get closer to recession, these sovereigns can provide a nice buffer within a diversified portfolio.

Another thing to note is that the Chinese sovereign yield curve has steepened considerably within the past year, where we saw a “bull steepener” in which short-term yields fell faster than their longer-term counterparts.

Short-term yields have been pushed lower due to the current economic and political uncertainty. This is a signal that investors are forecasting further unrest. This takes away some of the convenience of being invested in short maturities, especially as US Treasury yields in the short part of the curve are somewhat comparable. In fact, while the two-year CGB offers a yield of 2.61%, the two-year Treasury offers 2.51%, just 10 basis points off the CGB.
Source: Bloomberg
Comparing CGBs and Treasuries, investors might be concerned that the yield pickup in CGBs is very low. However, investors should bear two very important factors in mind:

1. The People’s Bank of China may want to intensify its easing efforts. At the moment, there are ongoing talks on how the Chinese government might stop an economic slowdown. Until now, the PBoC has injected extra liquidity into the banking system in the hope that the banks would lend to the small- and medium-sized enterprises that have suffered most from the trade war. 

However, banks have not been able to lend as much as desired due to concerns about high debt levels and credit quality among borrowers; most of the time, they simply buy bonds in the financial markets. Market participants are wondering whether the PBoC will need to expand its easing efforts in order to avoid a deepening crisis. 

Although the PBoC is banned from buying government bonds, leading many to believe US-style QE is impossible in China, we believe that it will seek to walk that path if necessary. Before that point, though, the bank will try to make its existing monetary policy more effective. Either way, we can expect PBoC measures to support the bond market’s valuation pushing CGB yields lower.

2. There might be some upside in holding renminbi against USD. The US dollar is still trading at a 15-year high, and with the US on an easing path we can expect the dollar to correct. At the same time, it is in China’s interest to keep the renminbi stable to avoid chaotic devaluations and to continue to attract capital.

Although it seems as though CGB have rallied significantly with only a little room for further appreciation, investors should consider the above while keeping in mind that foreign investors gaining more and more access to a previously closed market will play in favour of CGB holders.

In April of this year, the Bloomberg Barclays Global aggregate index will include CGBs and policy banks’ bonds and onshore Chinese sovereigns will represent the index’s fourth-largest currency component in the index after the US dollar, the euro and the Japanese yen. CGBs are on track to becoming a fundamental component of clients’ portfolios and investors should embrace them.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992