It’s only a matter of time before global fixed income investors own more Chinese assets, particularly given the prospect of benchmark inclusion into several major global indexes and greater accessibility for the onshore Chinese bond market. Chinese bonds seem favorable to many investors looking to add an element to their global investment portfolio.
An important question to examine is why investors are showing an increasing interest in China’s onshore bond markets? China’s bond market is the world’s third-largest after the U.S. and Japan, representing over 10% of the global bond market. While offshore Chinese markets and onshore equity markets have long been accessible to global investors, lack of access has limited foreign investor ownership of the onshore bond market to a relatively low. But this is changing. The onshore China bond markets, particularly the China Interbank Bond Market (CIBM), are becoming increasingly accessible to global investors. With this reasoning investors should consider that the inclusion of onshore China bonds into emerging market (EM) and global bond indexes could increase strategic allocations.
China also faces a risk over the next few years. One risk is the potential for a downturn in property. Household debt at 53% of GDP in 2017 is not high in absolute terms, but its rise in combination with property reflation raises some red flags. In the past 10 years, household debt has jumped 700% from US$830 billion to $6.3 trillion as property prices increased by 300% in major cities. Measured against urban disposable income, household debt rose to 1.4x from 0.6x. If this pace is sustained over the secular horizon, property reflation and household debt may reach alarming levels. However, investors should know that current housing inventory is low and tight government policy has plenty of room for relaxation.