While all talks are on the potential high yield returns from China bonds, investors should also weigh the risks involving this asset class - currency, credit and interest rate.
Citywire AA-rated Teresa Kong, portfolio manager at Matthews Asia, said the firm is keeping duration lower than the benchmarks for its strategies in the current environment of rising interest rates.
This is a measure of interest rate risk, Kong said, adding ‘We also closely consider the creditworthiness of individual issuers and currency trends of individual countries when buying and selling bonds for our portfolios.’
Albeit the risks in bond investing, Matthews Asia is of the view that Asian fixed income – including Chinese bonds – should be an integral part of a globally diversified bond portfolio.
State Street Global Advisors (SSGA) noted that inclusion of China into the Bloomberg Barclays Global Aggregate Bond Index should accelerate China’s acceptance into the mainstream of fixed income, especially as long as the country continues to reform the financial sector.
‘As allocations to Chinese bonds become a larger part of global investors’ portfolios, we believe it is important to carefully monitor how these new additions affect major bond indices and global debt markets overall.’
SSGA said investors and their managers will need to monitor the progress of the Chinese financial sector reforms and the developments in Chinese debt markets overall to navigate the recent development in China’s bond market.
Next year’s kick-off could be delayed if the People’s Bank of China (PBoC) and the Ministry of Finance fail to clarify the implementation of delivery-versus-payment (DVP) settlement, block trading and taxation policy, it added.
Citywire AAA-rated Gordon Ip, chief investment officer for fixed income at Value Partners, said the inclusion of China onshore bonds into the Bloomberg Barclays Aggregate Index is a positive, as it may prompt the other major index such as the World Government Bond Index to include it as well.
‘There are massive amount of money following these indices, so the implication could be deep and the potential demand could be huge,’ he said.
However, there are still many details market participants need to figure out, such as tax implication, how the bonds will trade and settle in the interbank market (CIBM) and also through bond connect, Ip said.
The other issue is liquidity as it’s a buy and hold market for China’s bond market for now, but Value Partners’ Ip thinks it could improve as more active market participants in the market.
China’s bonds will be phased in over a 20-month period starting in April 2019, increasing in 5% increments each month after that.
By November 2020, it is expected that the Global Aggregate index would include 377 Chinese securities, representing 5.55% of the index.
CNY-denominated bonds would then be the fourth-largest currency component of the index after the US dollar, euro and Japanese yen, while the yield to maturity of the index would increase from 1.86% to around 2% and duration would be reduced by about 0.1 year, according to the SSGA report.