Is investing in individual Chinese bonds misguided?

As regulators further open the bond market, timing is good for investors. But some analysts caution against investing in individual issues.

As China opens up and gains more attention from international investors, the Chinese bond market, with one of the highest yields among global markets, is attracting considerable interest. With thousands of Chinese bonds issued each year, a senior official from UBS insists investors actively consider bond funds.

As the third-largest bond market globally, China's nominal yields and real yields of 10-year government bonds stand higher than those of the US, UK, Germany and Japan.

"When you look at Europe, the yields are close to zero; and if you are looking at Japan, they are at zero," says Hayden Briscoe, head of fixed income Asia Pacific at UBS Asset Management.

"We think the opportunity is in Chinese bonds," says Briscoe, noting that Chinese bond market generates one of the highest yields (in different types of bond yield) when compared to developed markets around the world.

However, with the large amount of Chinese bond issuance, Briscoe does not recommend investors to invest in individual bonds. "Funds make more sense to us," says Briscoe.

During the first six months of 2018, the total number of Chinese bonds issued reached 4,251, a 26.22% increase compared to the same period last year. Total Chinese bond issuance accounts for 4.76 trillion yuan during the same period, up 32.15%, according to Chinese rating agency Pengyuan Credit Rating.

"In the old days, there were few issuers around so you could buy individual bonds. Now, if you are buying the individual bonds, you are missing out on the opportunities, because there are hundreds of issuers now," says Briscoe. "And you cannot build yourself a sufficiently-diversified portfolio without taking individual credit risks," he adds.

Chinese bond fund recorded an average rate of return 2.47% as of end July, according to Chinese financial data provider Wind. More than 100 bond funds recorded a rate of return surpassing 5%. The average growth rate of the net asset value of long-term fixed income funds and bond index funds both exceeded 3% during the first seven months of this year.

"There is no reason you should not be investing in Chinese bonds," says Briscoe. "It has all the safe attributes that you are looking for – high nominal yields and high real yields. And what most people don't realize is that Chinese bonds also offer you negative correlation with risk assets," he adds.

In addition, with Chinese regulators further opening the bond market, it is a good timing for investors to tap into this sector. "The market is open now. There is free access for everybody, so there are no further restrictions," Briscoe says.

Briscoe says this year has seen the good performance of Chinese government bonds. "And the second opportunity is something for the 12 months ahead – we think that going into Chinese high yields is going to offer you one of the highest returns that you can get from the high yield markets around the world," he adds.

But uncertainty still exists in the Chinese bond market, as the deleveraging is still ongoing in the financial sector and more details of the new regulations on the asset management industry are yet to roll out.

Chinese fund managers suggest investors stay cautious towards the funds investing in non-investment grade bonds. Fixed rate bonds and investment grade bonds, on the other hand, are expected to perform well in the upcoming months.


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13 Sep 2018

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