China fixed income – too big to ignore?

Amid ongoing reforms and improving accessibility, in our fourth mini interview with Kevin Zhao (our Head of Global Sovereign and Currency, Fixed Income), we explain why China government bonds could be a potential investment opportunity for global fixed income investors.

Watch this space for the rest of this series of interviews on global flexible fixed income investing insights.

Q: How important are emerging markets, and China in particular, in a global portfolio?

A: As mentioned earlier we have been very vocal that the "New Global" is the G20 rather than the narrowly focused G7. G20 countries account for more than 80% of global GDP, trade, and financial asset capitalization, while G7 accounts for less than 45% of global GDP. China is already the third largest bond market in the world but it had zero representation in the bellwether Global Aggregate Bond Index before Bloomberg decided to include China in April 2019. China's weight in this widely followed global bond index will rise to near 6% by the end of 2020. We believe that broadening bond investment from G7 to G20 countries will allow investors to achieve higher potential returns and better diversify portfolio risks.

Q: What can investors expect from the inclusion of Chinese bonds in global bond indices?

A: Once China's weight in global bond indices rises to around 6% and because of its lower correlation with other bond markets, investors, especially in global bonds, should be able to enhance portfolio returns. However, investors must be familiar with China's economy and financial market structures; as we often say, "do your homework". UBS AM has been very early and proactive in entering China's equity and bond markets with the best presence among foreign banks and asset managers. It is important for investors to understand that China is not a typical EM market nor investors should apply their experience and skills learnt from developed markets blindly to investment in China given drastically different political, economic and financial systems.