Chinese bond market markets are «simply too large to ignore», said VP Bank's Thomas Rupf in an interview with finews.asia, adding that regulatory tightening across sectors and the ongoing pandemic are unlikely to derail the outlook.
Why are Chinese bonds an attractive portfolio supplement?
There are several compelling reasons to invest in Chinese bonds.
Chinese bonds afford better yields than those to be earned on comparable maturities from the industrialized nations. Its actual yields are positive compared to negative in the west. China's 10-year government bonds are now yielding around 3 percent, and the current consumer price inflation rate is slightly above 1 percent.
Correlation is low with other bond markets [and], like its equity market, it is simply too large to ignore.
Hence, there is a lot of room to the upside, and we expect the inflow of foreign capital will be a key theme for the years to come.
«Don’t just rely on headline numbers and some assurances or shortcuts.»
China’s bond markets are experiencing record-high defaults as well as poor headlines from major names like Huarong or Evergrande. Any concerns about such risks?
Chinese bond defaults reached a record $18 billion in 1H21, but the market is still worth $27.2 trillion. Hence, while it is a record in absolute numbers, on a relative basis, it is manageable. If you look at the companies that defaulted, they are the weaker SOEs and the heavily indebted property developers, which generally offered higher yields for the risks that investors are taking.
In fact, these defaults may be a good thing, in that it could help the market develop and investors more aware of the aged old truth that higher yields come with higher risks. That is one reason why we advocate investing through an actively managed fund.
Don’t just rely on headline numbers and some assurances or short-cuts.
What about the pandemic or ongoing regulatory tightening across various sectors?
China will be the first to recover.
Also given the Chinese bonds' attractive yield, we don’t see any big impact from the coronavirus pandemic. Even with the regulatory tightening on the technology and education sector, the bond market continues to remain attractive.
What is your view on ongoing developments in the Chinese bond market with regard to sustainability?
China has ambitious zero carbon goals. Most of the planning is in early stages and is just starting to trickle down to the companies.
No doubt, China is the world's second biggest green bond market after the U.S. with 800 billion yuan ($123.4 billion) of green bonds outstanding. In the first quarter of this year, Chinese issuers sold $15.7 billion of green bonds, quadrupling from a year earlier and exceeded the $15 billion of such bonds by U.S. issuers.
However, given the nascent stage, it will take time to develop. Currently, there is very little pricing difference and transparency as to how the funds are being used is still being developed.
«Even with the regulatory tightening on the technology and education sector, the bond market continues to remain attractive.»
How can foreign investors gain access to the Chinese bond market?
There are a few ways to gain access to this market: through the offshore market, onshore through the Bond Connect program or collective investment schemes (CIS). [CIS] is our preferred way of gaining access for several reasons: better liquidity, credit rating differences and currency risk.
We further advocate investing in actively managed funds as compared to passive funds based on our view that the more complex the universe, the more worthwhile it is to rely on the expertise of an experienced fund manager.
Thomas Rupf is the chief investment officer Asia & head of trading execution and interim head of Singapore at VP Bank where he has held various roles since joining in 2007.
