China's bond market could appeal in low-yield world
China might have the solution when it comes to fixed interest, as the China bond market may offer yield in a globally low yielding world, according J.P. Morgan Asset Management.
Kerry Craig, J.P. Morgan Asset Management global market strategist, said there was still yield to be found and China may be the new bastion for government bond investors.
“While some parts of the world may be suffering from an economic stutter, China’s economic momentum continues to build,” Craig said.
“The supply side of the economy has made up lost ground from the shut-down earlier in the year and indicators such as the growth rate of industrial production is the highest so far this year. The demand side is improving too.”
Craig said the People’s Bank of China (PBoC) had similar tools as other central banks but chose to use them more delicately than the “sledgehammer” approach of the European Central Bank or the US Federal Reserve.
“Perhaps wary of lessons learned after the Great Financial Crisis and the impact that excessive leverage could have on financial stability, the PBoC has carried out a more balanced monetary policy, focusing on targeted support to the real economy, avoiding the use of large scale liquidity injections or close to zero interest rates,” Craig said.
“This approach stands in sharp contrast to the foreshadowing of further easing by central banks elsewhere.
“The Fed’s new average inflation targeting framework pegs interest rates close to zero for years to come, the Bank of England and the Reserve Bank of New Zealand are both toying with the idea of negative interest rates.
“Even the Reserve Bank of Australia, which has been relatively austere in its use of extraordinary policy, is signalling that it may do more in the coming months to pin down bond yields.”
However, the onshore bond market was comparatively inaccessible to outside investors until recently, but the inclusion of Chinese bonds in broad global benchmarks in the past two years had increased their appeal.
“Realignment of investors to the changes in global benchmarks will prompt a flow of passive money into the Chinese bond market, creating an additional form of support,” Craig said.
“In a world swamped with liquidity and one in which central banks are prepared to show that they have more to offer, those investors striving for something like a ‘normal’ yield have to look beyond the usual suspects.
“The relatively high yield on Chinese government bonds, the potentially divergent paths in monetary policy and the broader inclusion in global bond indices are forces that make China’s bond market look downright heroic.”
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