Manu George, Senior Investment Fixed Income Director at Schroders comments on the change of regulation on China’s corporate bond market. The second largest corporate bond market in the world had restricted market access until now. Recently, due to a change in regulation, the market is now available to foreign investors. It is largely untapped but how many wonder how good an investment opportunity is it.
The market is now starting to open to foreign investors, which should prove a major step in the development and maturation of the market. In our view, this presents a significant opportunity for investors. At the same time, China’s economy is undergoing a significant transition, resulting in a moderation in its rate of economic growth. While this is causing some concern among investors, the bond market can benefit from a more moderate growth trajectory.
Manu George, Senior Investment Director, Fixed Income, Schroders
Why China’s economic transition may be supportive of bonds
China’s economic growth rate has been one of the most keenly watched indicators for many years now. In the mid-2000s, China saw consecutive years of +10% growth. A remarkable and unsustainably high rate. Since then, the economy has steadily slowed down. China recently reported its slowest economic growth rate in 28 years at 6% year-on-year in Q3 2019.
While a slowing economy is generally undesirable, it can be beneficial to bond market investors, especially in the absence of inflation. A slowing economy generally forces central banks to ease monetary policy, usually by lowering interest rates. As interest rates are lowered, bond prices rise – particularly government bond prices.
Theory holds that if central banks ease monetary policy, the cost of lending falls, encouraging companies and individuals to borrow and subsequently spend. This helps the economy regain its footing as activity increases.
Why is this important for investors in Chinese bonds?
However, the authorities are aiming to contain economic weakness through increased spending and easier monetary policy via lower interest rates. This activity should support bond investors.
Over the medium-term, we anticipate that Chinese economic growth will stabilize, just at a lower level than in the past. For the time being, with China in this state of transition, the risk is that the naturally lower rate of growth could decelerate. The authorities are determined to avoid this. As such it will likely be some time before a meaningful tightening cycle is viable. This could provide a solid foundation for Chinese bond markets.
