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Chinese government bonds have sidestepped a global debt sell-off since the start of the Iran war, as the world’s second-biggest economy emerges as a haven from soaring energy prices and rising global inflation.
Yields on China’s 10-year government bond have dipped marginally to 1.81 per cent since the end of February. In contrast, yields on 10-year US Treasuries have surged by 0.38 percentage points to 4.34 per cent, while yields on gilts have rocketed by 0.7 percentage points. Bond yields rise as prices fall.
Investors are betting that whereas major central banks in the US and Europe will be forced to keep interest rates at higher levels than previously expected to counter inflation triggered by rising oil and gas prices, China will be relatively insulated thanks to its energy mix and very low inflation before the conflict.
Demand from domestic buyers, whose ability to seek alternatives overseas is constrained by capital controls, has also kept Chinese government bonds from being swept up in the global sell-off.
“It offers a very uncorrelated investment option to investors like us,” said Jason Pang, a senior portfolio manager and Asia local rates and foreign exchange lead at JPMorgan Asset Management.
Chinese bonds’ resilience comes despite a lengthy rally that drove yields down from more than 4.7 per cent in early 2014 to about 1.6 per cent at the start of last year. That rally prompted warnings of a bubble and led the People’s Bank of China to caution that a sudden reversal in prices threatened financial stability.
Whereas Europe and much of Asia’s dependence on imported energy is viewed by investors as leaving them vulnerable to price rises, China’s relatively diversified energy mix, in which coal and renewable energy feature strongly, has offered some protection.
The country’s enormous strategic oil reserve and access to discounted Russian oil and natural gas have further shielded it from the energy shock looming over neighbours such as South Korea, Japan and south-east Asia, analysts say.
“China is less affected by this pass-through of the energy and the economic starting point is quite different,” said Mitul Kotecha, head of Asian foreign exchange and emerging markets macro strategy at Barclays.
“The PBoC is in a different position” to other central banks, he added. “We’re still looking at potential easing from China. It’s a very different monetary backdrop than what we’re seeing elsewhere.”
Chinese consumer price inflation rose to 1.3 per cent in February, its highest level in more than three years, but remains well below the target rate of 2 per cent.
Meanwhile, faced with a long-running crisis in real estate, memories of a severe bear market in stocks and few other investable options, many investors have plumped for government bonds.
The Chinese government bond market “has been able to absorb the impact better because the demand base is trapped capital”, said Vincent Chung, a fixed-income portfolio manager at T Rowe Price.
China’s capital controls strictly limit how much money its citizens can move out of the country, making its bonds relatively uncorrelated with the performance of other debt markets.
“Chinese government bonds are a relatively isolated market,” said Wei Li, head of multi-asset investments for China at BNP Paribas. “The majority of investors are domestic investors. It’s very different from the Treasury market.”
However, global investors have also been drawn to the market, even though yields have crept up since the start of last year.
“Since 2012, investing in CGBs has been one of the only ways for global government bond investors to outperform US inflation,” Charles and Louis-Vincent Gave, co-founders of research firm Gavekal, said in a recent note.
“All other major bond markets have delivered meaningful real losses and some, such as Japan, Germany and the UK, have even delivered negative nominal returns over this 14-year period.”
Some investors also view Chinese monetary policy more favourably, in comparison to US President Donald Trump’s sustained pressure on Federal Reserve chair Jay Powell to cut interest rates.
“Their [the PBoC’s] monetary policy is quite predictable,” said Wei at BNP Paribas. “When the central government wants the PBoC to cut yields, they cut yields.”
In contrast, the “Fed’s policy has lots of uncertainties . . . When the new Fed chair takes the role will the policies continue?” he added. “When investors invest in government bonds they don’t like these kind of uncertainties. When they invest in government bonds they want to have stability.”