Chinese bonds could solve diversification dilemma suggests Ashmore's Gustavo Medeiros

Nicholas Earl, 15/06/2021

Investors seeking diversification possiilies alongside their equity, growth and high-yield strategies should consider fixed income opportunities in China, suggests Gustavo Medeiros, deputy head of research at emerging market specialist Ashmore.

Value plays, high-growth strategies, and ESG products have been the primary trends in developed markets during the Coronavirus recovery period. Meanwhile there has been continued scepticism over fixed income in developed markets, and whether it can still function as a reliable safe asset. Mr Medeiros believes investors looking for a conservative counterweight should instead turn their attention towards the world’s second largest economy.

Speaking exclusively to Fundeye, Mr Medeiros explained: “It's interesting to the extent that global investors are struggling to find a fixed income asset that will provide a hedge or diversification against their high beta assets such as equities and high yield loans. Chinese bonds come up as an extremely interesting alternative.”

The deputy head of research pointed to multiple factors that could make China’s fixed income market highly appealing.

He outlined that, when it came to government, financial, and corporate debt, slightly more than 50 percent of all EM debt derives from China. Furthermore, China is the only single major government bond in the world that offers positive nominal and real interest rates on its government debt.

He also noted multiple trends supporting his perspective. Firstly, the renminbi currency is deeply integral to the global debt capital market, a reality confirmed by the rising popularity of the Chinese-renminbi dollar currency pair. It has become the second most popular currency pair traded worldwide, beaten only by Euro-dollar.

In addition, Chinese bonds have become an integral factor in emerging market debt generally, and Mr Medeiros highlighted that the country’s local financial capabilities are comparable with developed foreign economies in terms. China has a very deep and developed capital market and banking system which is comparable to its vast economic scale. This is despite the fact the government size and borrowing capabilities still have potential to grow.

Mr Medeiros said: “It is a government that is still relatively small vis-a-vis the size of the economy. So, in terms of risk, you're buying a bond that is very low risk. It's as close to risk free as it gets when it comes emerging market economies.”

Alongside its risk profile and influence, Mr Medeiros reiterated that China was the first major economy to recover from the pandemic, with the country recording two percent growth in 2020, and on track to record eight percent growth this year. This rebound will be sustained beyond the immediate Covid-19 aftermath, with the IMF forecasting that the country will be second only to India among the fastest growing economies in 2022.

This possibility for growth is supported by the success of its vaccine rollout. China is now responsible for more than 50 percent of global jabs, vaccinating close to 1 percent of its population every day at a pace that will inoculate the entire adult population by September. The country vaccinated 13.6m individuals per day in late May, which compares with an average daily total of 11.7m in the rest of the world.

 Mr Medeiros concluded: “It's a market that we've been following for a while, and have been investing in for a long time."

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