The positive yields offered by Chinese government bonds will prove a big attraction for investors, despite concern around Chinese economic policy, according to Schroders.
It comes after the People’s Bank of China announced it would be removing quotas on its bond market at the end of February.
Rajeev De Mello, head of Asian Fixed Income at Schroders, said: “More recently the focus has been on measures to limit outflows but this step represents a continuation of the medium-term opening policies.
“So far, we have seen an increase in quotas for private investors, the removal of quotas for foreign central banks and the inclusion of the renminbi into the SDR basket (an international reserve asset created by the International Monetary Fund).”
Mello said he believes institutional investors will embrace Chinese government bonds as many liquid bond markets outside the US have negative yields.
He added: “…As operation details are spelled out, bond index providers could start including Chinese onshore bonds in global indices. This would also attract global investor interest.
“Nevertheless, uncertainty around currency policy remains on the larger hurdles for foreign investors. However, this should be resolved as the year progresses and would then be a signal to increase investments in Chinese government bonds.”
Mello concluded that the Chinese offshore bond market is suffering from the high implied yields due to expectations of sharper currency depreciation with issuers not wanting to pay high yields and buyers worried about the volatility.
He suggests that the opening up of the onshore market will, therefore, further encourage international investors to migrate towards the more liquid domestic market.