China’s fixed-income marketplace isn’t monolithic, but it is massive. The onshore RMB segment alone is bigger than those in France, Germany and the UK combined.
Three different investable markets for Chinese bonds
Outside of Asia, “yuan” is generally the term used to describe China’s currency. But “renminbi” (abbreviation: RMB) is the official legal name of China’s currency, and the term used the most in China and in Asia overall. Bond investors should be aware of the two kinds of renminbi used in financial transactions.
- In “onshore” China (sometimes called mainland China), transactions are done using the onshore traded renminbi (abbreviation: CNY). This is where “onshore RMB”/“onshore CNY” bonds get their name.
- In “offshore” regions (those outside of mainland China), transactions are done using the offshore traded renminbi (abbreviation: CNH). This is where “offshore RMB”/“offshore CNH” bonds get their name.
China’s regulators are intent upon making the onshore RMB currency (the CNY) a more “internationalised” one – similar to how the US dollar (USD) is used around the world to conduct transactions. That makes the onshore RMB bond market increasingly important.
Key renminbi facts for fixed-income investors
The total value of China’s onshore RMB bond market reached USD 15.5 trillion at the end of 2020, and many market participants are expecting the market to grow significantly in the coming years.
China’s onshore RMB bond market is also diverse, with three main segments of the market: money market instruments, “rates” and “credits”.
- Rates bonds form the largest segment of the onshore RMB market (55% as at 30 June 2020). This group broadly consists of central government bonds (CGBs), local government bonds (LGBs) and bonds from policy financial banks (PFBs, which are large financial institutions owned by the Chinese government).
- Credit bonds encompass issues from government-linked financing entities, state-owned enterprises (SOEs), financial institutions (such as banks and insurers) and privately owned (non-government) corporations. Credits make up about a quarter of the onshore RMB market.
- Money market instruments issued by banks and corporations make up the rest of the onshore RMB bond market.
Outstanding bonds by market
Source: Chinabond, Chinaclear, Wind, Standard Chartered Research. Data as at 30 June 2020.
When investing in the onshore RMB bond market, it’s important to work with a partner who can help you assess the creditworthiness of an issuer. The credit quality of bonds issued by LGBs, SOEs and private companies can vary widely. Moreover, China’s onshore credit rating system differs from international rating conventions. For example, onshore bonds rated AA+ would typically be rated as “high yield” on an international scale.
Onshore RMB bonds’ breakdown by credit rating
Source: Wind, Standard Chartered Research. Data as at 30 June 2020.
China has been making it easier for non-mainland China investors to access to its domestic capital markets. This has paved the way for Chinese bonds to be included in global benchmark indices – with the latest being the FTSE Russell WGBI in November 2021. China is also working to make the renminbi a more “internationalised” currency. Together, these factors should help international investors’ holdings of RMB bonds to rise over time.
But international investors still own less than 3% (about USD 540 billion) of the entire RMB bond market. This is significantly lower than the 10%-25% foreign bond ownership range observed in other emerging-market nations. It is also lower than China’s representation in major global bond indices. This indicates that foreign interest will likely keep growing in the coming years.
Foreign ownership of China bonds
Source: CEIC, WIND, Citi Research. Data as at 31 January 2021.
In recent years, governments and companies have grown increasingly comfortable using the renminbi to conduct international transactions. This can help these institutions eliminate currency risk, since one currency doesn’t need to be exchanged for the other – a process that can cause fluctuations in value.
Another factor making the renminbi attractive to international investors is the way China’s central bank – the People’s Bank of China, or PBoC – has resumed using conventional tools (such as adjusting the short-term interest rate) to enact its monetary policy. Compare this with the unconventional tools that other large central banks are using, such as the massive bond purchases known as “quantitative easing”. Some investors consider these tools to be less sustainable and possibly riskier. That makes the PBoC’s more conventional approach – and China’s renminbi – more attractive to many international investors.
As the international community turns to the renminbi, there should be a corresponding need for investors to seek investment assets denominated in renminbi. This may help lift the value of RMB bonds over time, which would likely benefit investors who already own these bonds.
Global central bank reserves (as at 2Q 2020) and projected growth of RMB usage in global reserves by 2030
Source for global central bank reserves: IMF, JP Morgan Asset Management. Data as at 31 October 2019. Source for projected growth of RMB: Morgan Stanley Research, Haver.
Onshore RMB bonds have exhibited low correlations to other asset classes. Case in point: onshore RMB bonds moved in the same direction as global bonds only 22% of the time. As a result, holding onshore RMB bonds in a global portfolio may improve overall diversification.
3-year return correlation of onshore RMB bonds vs other major asset classes
Source: Bloomberg. Data as at 31 December 2020.
Over time, the returns of onshore RMB bonds have been steady. Moreover, their volatility has remained low, meaning there have been relatively few large swings either up or down. When these two metrics are taken together, they can be expressed as a “risk/return” profile. And as the accompanying chart shows, onshore RMB bonds have an attractive risk/return profile compared with other major asset classes. That can make onshore RMB bonds a helpful addition to a range of portfolios.
3-year risk/return profile (in USD)
Source: Bloomberg, Allianz Global Investors. Data as at 31 March 2021. Please see the disclosure at the end of this document for important index information.
Interest rates in developed economies have been low or even negative for some time. This has contributed to low to negative yields for many types of bonds, as the accompanying chart shows. Moreover, given that the global economic environment continues to be somewhat weak, we expect interest rates to remain at the suppressed levels for some time. That makes it all the more important for investors to pursue sufficient sources of yield potential. Onshore RMB Chinese government bonds (CGBs) have a higher yield than most developed-market government bonds. Moreover, CGBs offer an average credit rating of A+. That means investing in CGBs can provide investors with solid credit quality and attractive additional yields.
5-year government bond nominal yields
Source: Bloomberg, Markit IBoxx, JP Morgan, Allianz Global Investors. Data as at 31 December 2021. *Based on JP Morgan Asia Credit Index. Refers to yield-to-maturity (YTM). **Based on Markit iBoxx SGD Corporate Bond Index. Refers to annual yield.