BEIJING – American investors are among the many foreigners looking to profit from China, especially with its bond market.
A clear area of interest is government bonds, where the 10-year-old Chinese has a yield of more than 3.2%. In contrast, the most recent increase in US rates pushed the 10-year Treasury yield to just 1.7%. This big difference gives investors in Chinese government bonds a significantly higher return.
“American investors remain very interested in investing in the Chinese market,” said Tao Wang, Asia’s chief economist and chief economist for China at UBS, on Thursday, during a webinar with the Institute of International Finance. “Especially from the bond market point of view, there is a structural increase in interest.”
Although “China offers high and stable yields,” she noted that other countries are still using measures to boost growth that have resulted in negative yields for many bonds. This means that bond buyers will have to pay the issuer when the bond matures, instead of making money from it.
Specific data for U.S. investor holdings were not available, but investors outside mainland China held about 3.5% of the yuan-denominated bond issues existing at the end of February, according to Reuters. Foreign holdings of Chinese government bonds, in particular, reached about 10.6% of issues last month, Reuters said.
In just two years, foreign holdings in Chinese government bonds almost doubled to more than 2 trillion yuan ($ 307.7 billion), according to data from Wind Information.
The increase in interest rates occurs with the addition of Chinese securities to the main investment indices monitored by global investors, generating billions of dollars in purchases of Chinese securities.
These purchases have increased in recent months for JP Morgan Asset Management’s China Bond Opportunities Fund, according to the company’s fixed income portfolio manager in Asia, Jason Pang.
“There is no clear reason not to disengage from this specific market,” he said. Pang pointed out that the Chinese economy is ahead of other countries when it comes to recovery from the coronavirus pandemic, and said that the likelihood of “a much higher sale at China’s rates is much less than in the rest of the world”.
As much as international interest in the Chinese bond market has grown, Pang said that many of the investments are still in an “experimental phase”, as foreign investors still need to learn more about the Chinese mainland market.