How does the Chinese bond market provide a unique diversification opportunity?

Chinese local bond market. Investing in Chinese government and policy bank-bonds.

07 jul 2020

Chinese Treasury bonds are viewed as one of the strongest, biggest and most liquid segments of China's bond market, along with policy bank bonds. Denominated in CNY and negatively correlated to developed markets, these bonds provide a powerful diversification tool.

In 2019, index providers Bloomberg Barclays and JP Morgan announced the country's bonds will be included in their global indices, a move likely to generate investments of almost USD 300 billion in the coming years. So far, chinese bonds are expected to account for 6% of global aggregate bond indices in 2020 and analysis shows that this allocation can offer significant diversification benefits to a global bond portfolio.

In addition to offer significant diversification benefits, an allocation to China fixed income can also take advantage of the ongoing growth and globalization in China. Moreover, the inclusion of China policy bank bonds with an issuer capping of 20% each – as per the maximum allowed under UCITS guidelines – should increase the yield pick-up and has historically demonstrated to offer a more attractive return relative to pure China government bond exposure. In addition, China policy bank bonds have shorter maturities (1-10 years) than government bonds, and in this index, Treasury and local government bonds with maturities longer than 10 years will be removed to increase the overall liquidity of the universe.

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