As Chinese government bond yields approach 4%, BNP Paribas Asset Management is still constructive on parts of the onshore bond market in the medium term.
In its weekly fixed income update, JC Sambor deputy head of emerging markets fixed income said 4% is not by means a meaningful psychological threshold.
‘Ten-year Chinese government bonds have broken through these levels several times. For example in 2014, and we do not consider it a fear threshold. That said, the higher yields do reflect a few genuine concerns,’ he noted.
The asset manager expects inflation to gradually pick up and the central bank’s monetary stance might have to remain tight despite lower economic growth.
While it is unclear how higher US Treasury yields will translate into higher yields in China, there are nonetheless fears domestically in China that the country will not be immune to higher global rates, it said.
BNP believes policymakers will strike a balance when it comes to deleveraging.
The need to inject some credit risk into the system through increased onshore default rates and the necessity of avoiding the creation of systemic risk in the system. Gradualism will remain the key word, as always in China, Sambor noted.
On the issuance side, although BNP is concerned about overall fiscal risks in the longer term, the firm sees little supply risk in the short term.
‘Domestic demand should remain strong, especially if the A-share market enters into a consolidation phase after what has been a ‘one-way street’ rally,' the firm added.
Next year, BNP expects China to be included in both global and emerging markets fixed income indices. This inclusion could trigger significant inflows; by its own calculations, around $200 billion.
‘We do expect the percentage of foreign ownership in China to increase significantly over time as people become more comfortable with RMB risk and yields remain appealing compared to developed markets,’ he explained.