Chinese bonds look promising

China’s economy is going through a much-needed slowdown in growth, which could present some opportunities for bond investors, according to Schroders economist David Rees.

Off the back of decisive monetary and fiscal measures, China posted 18% year-on-year GDP growth in the first quarter of 2021.

“Growth in China is going to be slower over the long term, but it will still be faster than other markets in the world,” says Rees. “Building up the high-technology sector should help with this, and this could also help raise the overall income level of the country and its income per capita over the long term. We expect China to be growing at around 5% per year over the next decade, and productivity growth will be key in achieving that.”

Chinese bonds are growing increasingly attractive for fixed-income investors.

“Chinese corporate bonds boast attractive yields and wider spreads with lower duration risks than other global credit markets,” says Angus Hui, head of Asian and emerging markets credit at Schroders.

“Another point to note is that Chinese bonds have low correlation with other asset classes, which means they can offer diversification benefits. China’s economic and monetary policy cycles will not be perfectly synchronised with other parts of the world but influenced by conditions within China.”

Hui also expects increased issuance of green bonds, both domestically and offshore, as the country’s environmental standards move closer to international levels.

“For instance, green coal projects are no longer considered as green bonds in China anymore, and we expect more companies from the renewable and alternative energy sectors, as well as new economy and tech companies, to issue green bonds going forward.”