Foreign investors pile into Chinese onshore debt markets in search of yields as coronavirus pandemic worsens
- Yields on 10-year Chinese government debt have greatly exceeded US 10-year Treasury notes, similar government debt this year
- Foreign investors held US$319 billion in Chinese onshore debt as of end of March
Fixed-income investors are piling into yuan-denominated government debt at a record rate this year as they seek a safe haven amid the coronavirus pandemic, which threatens to send the global economy into a downturn not seen since the Great Depression, according to analysts and investment managers.
At the end of March, global investment funds and overseas investors held 2.26 trillion yuan (US$319 billion) in Chinese onshore debt, according to Bond Connect Company, the operator of the three-year-old Bond Connect programme, which allows qualified foreign investors to buy Chinese bonds without setting up an onshore business. That was a slight decrease from a record 2.28 trillion yuan at the end of February. Overseas investments in Chinese debt rose 28 per cent in the first quarter on a year-on-year basis. Foreign investors, however, remain a small percentage of the US$14 trillion onshore bond market in China.
Jerry Li, head of Greater China local markets at Deutsche Bank, said there has been less “market noise” in China than international bond markets over the pandemic.
“We have been through a big rally in international fixed-income markets [followed] by a big sell-off when liquidity dried up in these dollar bond markets,” Li said. “If you look at the China bond market, we actually see relatively low volatility and better liquidity compared with the dollar bond markets.”
The new coronavirus, known as SARS-CoV-2, has infected more than 2.1 million people worldwide and forced near shutdowns in major cities – from New York to Singapore – around the globe.
The International Monetary Fund said last week that the global economy was very likely to experience its worst recession since the Great Depression, outpacing the downturn during the global financial crisis in 2008.
China’s economy contracted by 6.8 per cent in the first quarter as a result of widespread shutdowns over the coronavirus. That marked the first time the country’s economy shrank since the government began reporting quarterly gross domestic product growth nearly four decades ago.
However, the government is expected to undertake additional fiscal stimulus to boost the economy, which might ultimately fare better than other major economies around the world over the course of the year, according to investment manager Invesco.
