U.S. investors are among the many foreigners looking to profit from China, particularly its bond market.
One clear area of interest is in government bonds, where the Chinese 10-year has a yield of over 3.2%. In contrast, the latest rise in U.S. rates has pushed the 10-year Treasury yield to only 1.7%. That wide difference gives investors in Chinese government bonds a significantly higher return.
“U.S. investors continue to be very interested in investing in (the) Chinese market,” Tao Wang, head of Asia economics and chief China economist at UBS, said Thursday during a webinar with the Institute of International Finance. “Especially from the bond market perspective, there is a structural increase in the interest.”
While “China offers high and stable yield,” she noted that other countries are still using measures for boosting growth that have resulted in negative yields for many bonds. That means bond buyers will have to pay the issuer when the bond matures, rather than earn money from it.
Specific data for U.S. investor holdings wasn’t available, but investors outside mainland China held about 3.5% of existing yuan-denominated bond issuance as of the end of February, according to Reuters. Foreign holdings of Chinese government bonds in particular reached about 10.6% of issuance last month, Reuters said.
In just two years, foreign holdings of Chinese government bonds have nearly doubled to over 2 trillion yuan ($307.7 billion), according to data from Wind Information.
The increased interest comes as Chinese bonds were added to major investment indexes that are tracked by global investors, prompting billions of dollars in Chinese debt purchases.
These purchases have grown in the last few months for J.P. Morgan Asset Management’s China Bond Opportunities Fund, according to the firm’s Asia fixed income portfolio manager Jason Pang.
“There’s not any clear reason why we shouldn’t be disengaged from this particular market,” he said. Pang pointed out the Chinese economy is ahead of other countries when it comes to recovery from the coronavirus pandemic, and said the probability of “a much bigger sell-off in China rates is much lower than the rest of the world.”
As much as international interest in the Chinese bond market has grown, Pang said much of the investments are still in an “experiential phase” as foreign investors still need to learn more about the mainland Chinese market.