Skip to main content
logo
  • Funds

    Fund Listing

    • Fund Range
    • Fund Documents
    • How to Invest

    Asset Classes

    • Alternatives
    • Equities
    • Fixed Income

    Featured Funds

    • Alternative Investments
    • Fixed Income Funds
    • Global Macro Sustainable Fund
    • Global Macro Opportunities Fund
    • Global Research Enhanced Index (REI) Fund
  • Insights

    Market Insights

    • Guide to the Markets
    • Guide to Alternatives
    • Weekly Market Recap
    • On the Minds of Investors
    • Guide to China
    • Market Insights Overview

    Portfolio Insights

    • Long-Term Capital Market Assumptions
    • Global Asset Allocation Views
    • Global Fixed Income Views
    • Portfolio Insights Overview
  • Investment Ideas
    • Managing Volatility
    • Alternatives
    • Sustainable Investing
    • Income
  • Resources
    • Multimedia
    • Announcements
    • Insights App
  • About Us
  • Contact Us
  • Role
  • Country
  • Search
    Search
    Menu
    A Guide to the Chinese Fixed Income Markets
    11/15/2019
    A Guide to the Chinese Fixed Income Markets

    Investors around the world are increasingly curious about the Chinese fixed income market, which at USD 13.5trillion is now the world’s second largest1. Many investors will also find themselves owning Chinese bonds as funds tracking global bond benchmarks incorporate Chinese bonds, which many have announced they plan to do. 

    Chinese fixed income instruments will be more prevalent in international investors’ portfolios. However, many are unfamiliar with the rapidly changing dynamics in parts of the market, as well as with the feasibility of adding these instruments to a portfolio. To aid in this conversation, and to share our insights on the Chinese fixed income universe, we present this series of papers. These pieces can be read individually to shed light upon a particular aspect of Chinese fixed income investing, or taken collectively, they offer a more complete exploration of the Chinese fixed income market for the international investor.

    We divide this conversation into the following topics:

    1. The executive summary: 10 reasons to explore Chinese onshore bonds
    2. Bond market basics: What is the Chinese fixed income universe?
    3. Characteristics of Chinese bonds
    4. Chinese bonds go global
    5. Common questions about the Chinese fixed income market  

     

    Executive summary

    In Brief

    • China’s fixed income landscape is vast: The market represents USD 13.2trillion in value2.
    • Investors have been able to access the offshore and foreign currency listed portions of this market for many years now, but are gaining access to the onshore market. Onshore bonds represent over 90% of this market2.
    • Changes to access, ratings, and investor needs make portions of this onshore market relatively attractive.
    • This market is rapidly changing, making constant monitoring and thorough research essential to successful investing in China’s fixed income market. 

    Behind the headlines

    Chinese debt has made headlines in recent years, although rarely for good reasons. Concerns have risen about the absolute level of debt outstanding. Estimates currently place China’s total borrowing as a percent of nominal gross domestic product (GDP) at 259%3. This level is comparable to a number of developed markets and, as a solitary statistic, is not an outright concern. 

    What worries some investors, and generates the majority of headlines, is the speed with which China’s debt burden has risen to this level. The stimulus efforts undertaken in response to the 2008 Global Financial Crisis (GFC) spurred a rise in China’s debt level from 140% of GDP in 2007 to today’s present heights.

    The speed of this increase, combined with the fact much of this debt has been created in the more opaque shadow banking system, prompted worries about financial stability, specifically, China’s ability to pay back these liabilities at a time when growth is slowing. These rising fears and greater international access may seem like the worst possible backdrop against which to begin a conversation about investing in Chinese fixed income. However, the twin efforts of promoting financial liberalization and financial stability with an already high debt load have created an opportunity for investors. Further liberalization will mean yields are likely to remain above those offered on many other countries’ similarly rated sovereign debt, even as yields remain low around the world in coming years. 

    The efforts to promote financial stability in a high debt society will support issuance in the bond market in the years to come—only a fraction of China’s debt is currently in the form of bonds—and greater investor ownership of this debt as it is securitized and listed will further China’s financial liberalization. As contradictory as these views seem, an understanding of Chinese debt and the Chinese bond markets (which are different things), and how asset markets in China will change over the next few years, requires consideration of different dynamics in each. 

    These factors combine to create a relatively attractive emerging bond market from a diversification, if not overall return, standpoint for foreign currency-based investors. That is, if you narrow the fixed income universe available in China down substantially. 

    Today’s market

    Several recent changes in China have furthered the investability of onshore bonds, which over time will be part of the tools China uses to promote financial stability, while also offering a new investment frontier to global fixed income investors. Notably, among these developments we will highlight: the efforts of the Chinese regulators to increase the accessibility of the onshore bond market to foreign investors since 2002, the ongoing internationalization of the Chinese renminbi, recognition of international ratings agencies and the gradual inclusion of Chinese onshore bonds into major fixed income benchmarks.

    Yet, international investors still face hurdles in making significant allocations to onshore Chinese bonds. Offshore bonds also present several of their own challenges.

    In summation, China’s market looks more attractive and is more accessible for long-run-focused investors than it has been at any point before, but international investors may want to proceed with caution.

    This is only the first step in understanding Chinese fixed income. We provide our key takeaways on the following pages, and upcoming papers will explore these topics further. 

    We have identified ten key considerations for investing in the Chinese fixed income universe.

    10 key considerations for investing in the Chinese fixed income universe

    1. It’s just too big to ignore: China is a country of many superlatives. It is the second-largest world economy and may soon become the first, it is the first contributor to global growth, and it already has the second-largest bond market in the world.

      China's bond market is the world's second largest
      EXHIBIT 1: BOND MARKET SIZE IN VALUE AND AS % OF GDP USD 

      Source: Bloomberg Finance L.P., International Monetary Fund, J.P. Morgan Asset Management. *Bond market outstanding refers to the total U.S. dollar value of bonds (corporate and government) in the market and does not reflect mandatory prepayment. Data reflect most recently available as of 31/10/19.

      Its bond market is big, but bonds and debt are different things. And China’s bond market represents a small share of China’s total debt, which is an important nuance when considering investing in the public bond market.

      Additionally, there is a nuance within China’s bond market: it’s actually three different markets. Investors can buy Chinese bonds listed onshore and priced in Chinese renminbi. This market is the largest by far, valued many multiples the other two segments of the market combined. Investors can also buy Chinese debt issued in offshore Chinese renminbi, listed in an offshore clearing center like Hong Kong. The third market is the foreign currency segment of China’s debt universe. These bonds, largely denominated in USD, are overwhelming corporate issuers and make up a significant portion of the Asian high yield credit universe, although they do not represent a large portion of China’s overall bond market. 


    2. China is being added to major equity and fixed income benchmarks: Over the last two years, major benchmark providers have started to include China into their benchmarks. As a result, flows into Chinese domestic equity and bond markets combined are expected to reach approximately USD 450billion4. The bond market will be the biggest recipient of these flows (we estimate around two-thirds). These flows will follow the planned increase of China’s weight in global bond aggregates. According to Bloomberg Barclays’ plans for incorporating Chinese bonds into its commonly referenced Global Aggregate Bond Index, China’s weight will reach roughly 6% by the end of 2020. China’s weight in emerging market-specific indices will be even higher.


    3. Higher allocations to Chinese assets mean greater currency diversification: Getting exposure to domestic Chinese asset markets means getting Chinese renminbi exposure. The Chinese renminbi became a reserve currency in 2015, but so far has not gained significant traction in terms of usage. This could change now that investors have access to several assets priced in Chinese renminbi. The flows triggered by benchmark inclusions should support the currency over time.


    4. Increasing accessibility for foreign investors: The relatively new Bond Connect scheme represents a major breakthrough as it allows foreign investors to trade Chinese bonds more easily and freely than ever before. They can now proceed through an offshore account and are no longer subject to restrictions like quotas or lock-up periods.

      Presently, the number of international investors using the Bond Connect scheme has risen well above the number of investors using previous programs. Some of these older programs, such as the Qualified Foreign Institutional Investors (QFII) and the RMB Qualified Foreign Institutional Investors (RQFII), are also undergoing reforms. Recently, investment limits were lifted for both the QFII and the RQFII.


    5. International rating agencies are increasing their onshore coverage: Standard & Poor’s Global Ratings, Moody’s Investor Services and Fitch Ratings have covered China’s central government debt for some time, but their coverage has not extended to most onshore issuers due to regulations barring their involvement in the onshore market.

      This is about to change as S&P has become the first international rating agency to be given access to the Chinese market, while Moody’s and Fitch are applying for licenses as well. Over time, this should reinforce the transparency of the Chinese onshore markets and be a standardizing influence on locally provided credit ratings.

      Investors will need to keep in mind that such agencies will still be operating within the domestic market and subject to the same regulatory landscape of the Chinese companies they rate, which will necessarily require some adjustment to their evaluations to take into account local dynamics. However, in our view, the biggest benefit of the major international agencies having a presence in the local market is the additional confidence they can offer international investors in interpreting locally issued ratings and in appropriately pricing the known risks. 


    6. New duration opportunities:  China’s Ministry of Finance manages the Chinese yield curve actively through frequent auctions of Chinese Government Bonds (CGBs) all along the curve from three months up to 50 years. This is not the case in every emerging market (EM), where action can be less frequent and maturities issued are not as evenly distributed. However, trading activity is overwhelming concentrated in the 3-month to 3-year portion of the yield curve. In this context, CGBs may offer a convenient way for EM bond investors to manage the duration of their portfolios. Duration management requires tradability across different tranches of the yield curve, and many EM sovereign bonds are more represented in the mid-maturity segment of the market.


    7. Management of risks is largely possible, since many risks are identifiable: 

        Sovereign debt sustainability: At a country level, Chinese debt sustainability looks higher than that of many of its EM and developed market (DM) peers. This is reflected by China’s long-term credit rating, which remains firmly in investment grade territory, as judged by the three main international rating agencies. Additionally, the lack of foreign currency debt maintains stability in government accounts compared to other Asian EMs. Government debt is not the source of debt worries in China.

        Liquidity: Currently, the liquidity of the CGBs market is much lower than for other major bond markets. According to the China Foreign Exchange Trade System (CFETS) trade volume data, 60% of trading activity in the interbank CGBs market is in newly issued bonds, meaning liquidity dissipates when bonds are no longer on the run.

        Currency: A volatile Chinese renminbi has certainly spooked many investors this year. But the government’s tolerance for truly large swings in short order is limited and the government seems unlikely to loosen the reins in the foreign exchange market. Rising portfolio inflows as a result of benchmark inclusions and increasing internationalization should also support the Chinese renminbi.

        Corporate credit risk: This is probably the biggest risk facing investors in the Chinese onshore bond market. The arrival of international rating agencies in China should help investors better monitor credit risks in the future. In the meantime, conducting thorough research into each individual issuer is an absolute must. That is, if an investor can even gain access to corporate bonds. Extremely low liquidity means the secondary market is tiny in comparison to the size of the corporate securitized debt market.


    8. Risk and return profile: Over the last 10 years, Chinese bond prices proved to be less volatile than those of U.S. Treasuries with similar maturities while offering similar returns, as shown in Exhibit 2. Investors should note that this holds true for local currency returns. Chinese bond investment returns translated back into U.S. dollars, while higher than in onshore Chinese renminbi, provide a more variable volatility outlook due to the fluctuations of the renminbi. How this consideration applies to individual investors will depend on which currency investors plan to bring their returns home in and whether or not they have access to currency hedging strategies. 

      Chinese central government bonds offer higher returns, volatility depends on currency
      EXHIBIT 2: GOVERNMENT BONDS ANNUALIZED RETURN AND VOLATILITY
      Chinese central government bonds, U.S. Treasury bonds, total return index

      Source: Bloomberg Finance L.P., J.P. Morgan Asset Management. Total return indexes are unhedged. Returns shown are 01/01/10 to 31/10/19. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31/10/19. 

      The return potential of the Chinese onshore bond market is likely to increase as foreign portfolio flows, driven by benchmark inclusions, could support bond prices and further develop the market for longer maturities. China generally offers higher yields than similarly rated peers, another factor pulling in foreign investment.

      Chinese government bonds carry higher yields than similarly-rated peers EXHIBIT 3: EVOLUTION OF CHINA'S SOVEREIGN RATING AND SELECTED 10-YEAR GOVERNMENT BOND YIELDS
      Rating of China's long-term government debt

      Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management. Data reflect most recently available as of 31/10/19. 


    9. Diversification: An allocation to Chinese onshore government bonds would generally have provided a decent level of diversification to foreign investor fixed income allocations. Indeed, as shown in Exhibit 4, the correlation between CGBs and global government bonds has, on average, hovered around 0.25 over the past 15 years.

      Diversification is an attractive element of Chinese government bonds EXHIBIT 4: CORRELATION BETWEEN CHINESE AND GLOBAL GOVERNMENT BONDS
      Unhedged USD total return index*, 12-month rolling correlations

      Source: Bloomberg Finance L.P., J.P. Morgan Asset Management.
      *Indexes are Bloomberg Barclays Global Government Bond Index and Bloomberg Barclays China Onshore Government Bond Index. Past performance is not a reliable indicator of current and future results. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31/10/19. 


    10. Active outperformance potential: Active management tends to thrive in inefficient and immature markets, two characteristics of the Chinese onshore bond market. On one hand, the market is evolving rapidly and becoming ever more accessible to individual investors. On the other hand, these changes are happening unevenly across different segments of the market and there are many China-specific dynamics to the fixed income market that may require specialists to navigate. 

      Even though this market is already the second-largest bond market in the world, it has remained almost entirely contained onshore, closed to all but the largest institutional foreign investors. As a result, market dynamics often operate in ways unique to China, which require deep research and expert management to successfully take advantage of the opportunities present onshore.


    11. 1Source: Bloomberg Global Debt Map, October 2019.
      2Source: ASIFMA, Bloomberg Finance L.P., J.P. Morgan Asset Management. Data as of December 31, 2018.
      3Source: Bank for International Settlements data on total credit. As of 1Q19. 
      4Source: International Monetary Fund Global Financial Stability Report, April 2019.

    The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. 

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

    J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

    To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy.

    This communication is issued by the following entities:

    In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only.

    For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.

    Copyright 2022 JPMorgan Chase & Co. All rights reserved.

    • Market Bulletins
    lets-solve-it-logo

    For more information, please call or email us. You can also contact your J.P. Morgan representative.

    1800 576 100 (Application enquiries)

    1800 576 468 (General enquiries)

    jpmorganam@jpmorgan.com

    JPMorgan Asset Management

    • Terms & Conditions
    • Financial Services Guide
    • Privacy Policy
    • Cookie Policy
    • Investment Stewardship
    • Voting Policy
    • Unit Pricing Policy
    • Complaint Resolution
    • Sitemap
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    © 2022 All Rights Reserved - JPMorgan Asset Management (Australia) Limited   ABN 55 143 832 080, AFSL No. 376919

    The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant JPMorgan fund Product Disclosure Statement (PDS) and Target Market Determination, which is available to download on this website and make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.