The Chinese yuan has appreciated against the US dollar this year.
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BEIJING—Chinese government bonds are likely to continue to behave differently from other countries’ bonds and could play an important role in portfolio diversification, strategists say.
Yields in China have edged lower in recent months, even as benchmarks in the United States, Japan and Britain have risen to multi-decade highs. This reflects how the world’s second-largest economy remains isolated from global capital markets and faces a deflationary environment in contrast to inflation concerns in other countries.
“Supportive macro policies and strong export growth will support demand for central government bonds, and we see scope for Chinese bonds to outperform developed market bonds on a risk-adjusted basis,” said Norbert Lin, head of Asia-Pacific fixed income portfolio management at Invesco. “CGBs continue to offer positive real yields and have defensive characteristics that play a role in global fixed income portfolios.”
China is dealing with a severe real estate market downturn and deflation, and as a result, the People’s Bank of China continues to maintain accommodative policies. The country on Monday reported disappointing growth in retail sales and industrial production in July, raising hopes for further interest rate cuts and stimulus. As a result, the country’s bonds will follow a different path than those in other major markets.
“China’s latest macroeconomic activity data for July was weaker than market expectations, suggesting that domestic demand may take longer to recover,” said Chun Lai Wu, head of Asia asset allocation at UBS GWM Chief Investment Office. “We expect the People’s Bank of China to continue providing support through liquidity operations and targeted credit policies.”
Chinese government bonds offer “valuable diversification benefits within strategic multi-asset portfolios” for global and Asian investors, Wu added.
Charu Chanana, chief investment strategist at Saxo, agrees. Other major central banks, including the European Central Bank and the Bank of Japan, have also raised interest rates.
“CGB can still play a diversifying role for global portfolios as China’s interest rate cycles are becoming increasingly different from those in the US, Europe and Japan,” he said in an email.
