Over the month of April 10 -year Chinese onshore government bond yields rose by 40 basis points. This movement can be explained by a modest economic recovery and picked up inflation. “We believe, however, that China is still far away from fully stabilizing and that the Chinese government will need to continue to support growth through fiscal and monetary policy”, said our fixed income specialist Althea. She also mentioned, although it seems that an agreement between the US and China is going to be reached shortly, it is unlikely that the US will completely remove its punitive tariffs. In this context, Chinese government bond prices will be supported in the medium term.
In the long run, Chinese sovereigns should also benefit from a gradual opening of the Chinese bond market through increased foreign demand. We believe that foreign investors will continue to find these securities attractive because Chinese government bonds are less correlated to other major markets while at the same time offering higher risk-adjusted returns in a yield-starved environment.
Chinese corporate bonds represent a big opportunity, as comparing to other markets worldwide they are still at early stage. However, risks are also relatively high with the space remains quite illiquid and the financial sector is still going through considerable changes. We believe that with the Chinese financial market is restructuring it would become more resilient along the time. Before that, it is best for investors to pick up risks selectively and prioritize quality, to capture the opportunities.
Althea indicates that it is not necessary to go into the corporate bond space in order to pick up extra yield from CGBs. In fact, it is possible to get some good pick-up by gaining exposure to one of the three Chinese development banks: China Development Bank (SDBC), Export-Import Bank of China (EXIMCH) and the Agricultural Development Bank of China (ADBCH).
Bond connect flash report
Content from BOND CONNECT:
By the end of Apr 2019, Bond Connect has onboarded 845 international investors, a significant increase from 503 at the end of 2018. In Apr 2019, Bond Connect witnessed the debut of investors from Sweden and Netherland, expanding coverage to 27 jurisdictions across the world. The scheme has engaged 57 out of the top 100 global asset managers, including 47 that have already onboarded and 10 in the pipeline.
Trading activities continue to break record in terms of number of tickets, rising to 1692 in Apr 2019 from 1347 last month. Accumulated trading volume reached RMB 458.7 billion year to date. In Apr, total trading volume was RMB 116.9 billion in the 22 days, leading to an average daily turnover of RMB 5.31 billion. Global investors were net buyers of Chinese bonds for RMB 35.6 billion.
Bond Connect launched the NCD primary subscription service on 29 Apr 2019 to further facilitate the participation of international investors in this increasingly popular asset class. The first batch of NCD primary issuances to Bond Connect investors was issued by Industrial Bank and Shanghai Pudong Development Bank, attracting subscription from 10 global investors totaling RMB 1.36 billion.
HKMA CMU extended securities settlement and cash input deadlines with effect from 29 Apr 2019, allowing for more sufficient time for fund preparation and efficiency in investment turnaround.
- Cut-off time for Bond Connect securities instructions and deposit of funds via HK RTGS instruction was extended from 12:00 noon to 2:00 pm; and
- Wire transfer of RMB funds can be made on real-time basis and the cut-off time was extended from 12:00 noon to 4:00 pm.