As China's Bond Markets Open, Investor Interest Grows

David Tan | 27/02/2017
China Markets

Summary

Regulators and policymakers in China have been enticing foreign investors with easier access to its bond markets – and our Asia-Pacific fixed-income CIO says it’s working. Of particular interest are green bonds: China has become the third-largest issuer and we expect continued growth in this area.

Key takeaways
  • China has been opening up its bond markets to foreigners, encouraging more onshore companies to issue bonds and providing a wider selection of credits
  • Defaults have gone up but have been contained; they can also be seen as helpful, since they improve capital allocations and reduce moral hazard
  • China’s inclusion in global bond indices is becoming increasingly more viable, particularly in global emerging-market debt indices

The fast growth and development of China’s bond market is consistent with its government’s ongoing efforts to allow easier access for foreign investors. As regulators and policymakers open up China’s capital accounts, the investor base grows; this, in turn, means more onshore corporations are encouraged to issue bonds, which provides investors with a wider selection of credit issues.

Not all of these bonds are without problems, of course, but even though the number of defaults has increased since 2014, the government has managed to contain systemic risks. In fact, defaults can be seen as a welcome part of China’s bond-market development, since they help improve capital allocations and reduce moral hazard over the long term. Nevertheless, we would still like to see China implement a proper and proven default-resolution process to allow the restructuring of stressed credits, rather than rely on liquidity injections.

Another important development in China’s fixed-income marketplace is the fact that China has become the third-largest issuer of green bonds – an area that we expect will continue to grow given China’s many critical environmental projects.

As foreign access to the onshore bond market opens up, China’s inclusion in global bond indices becomes increasingly more viable, particularly in global emerging-market debt indices. This should further boost the demand for China’s bonds, particularly for investors seeking more attractive yield potential and diversification opportunities.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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David Tan

CIO Fixed Income Asia Pacific
David Tan is Chief Investment Officer (CIO) Fixed Income Asia Pacific with Allianz Global Investors, which he joined in 2012. He is a member of the Asia Pacific Fixed Income team and is based in Singapore. David is also a member of the Global Policy Council, which is tasked with setting the strategic direction for the firm’s investments. David's experience in managing Asian bonds dates back to 1993. He joined Allianz Global Investors from AXA Investment Managers UK, where his last position was Executive Director Fixed Income Asia Pacific and Middle East. Before that, he held several positions at AXA Investment Managers, including CIO of Kyobo AXA Investment Managers in Korea, responsible for fixed income, equities, quantitative investments and asset allocation; head of fixed income Asia in Singapore, responsible for all fixed-income portfolio-management activities in the region; and a key member of the Asia balanced team, responsible for asset allocation. He was also a senior portfolio manager of total-return portfolios at ABN Amro Asset Management and Deutsche Asset Management. David has a B.B.A. in finance, with a joint major in economics, from Simon Fraser University, Canada.

Sticking to the Facts in a ‘Post-Factual’ World

Hans-Jörg Naumer | 03/03/2017
Risk-Barometer

Summary

Our Capital Markets and Thematic Research team outlines six “pro-factual” factors that can guide investors through a world that’s increasingly influenced by irrationality. Topping the list: Keep an eye on Brexit, European elections and US fiscal spending.

It's almost an irony of history: Now that the cost of preparing, storing and disseminating knowledge is virtually zero – thanks to digitalization – and "information" could be reaping the benefits of infinite scalability, possibly for the first time in history, the term "post-factual" is gaining in importance. Emotions, irrational behaviours, fake news: That's what it's all about. If something doesn't fit, it's made to fit. Rational investors are particularly well advised to be guided by pro-factual rather than post-factual factors when investing. March again provides more than enough reasons why:

Pro-factual factor #1: Geopolitics continues to be an issue. The UK government plans to file its application for a "hard Brexit" by 31 March, the Dutch go to the polls 15 March, and the race for the Elysée Palace in Paris moves into the home straight with the first round of presidential elections slated for 23 April.

Pro-factual factor #2: The period during which the debt ceiling in the US was carved in stone under constitutional law runs out in mid-March, yet the climb down the debt mountain has made virtually no progress, despite financial repression. In this respect it will be interesting to see what happens with the fiscal packages planned by the new US president, which already seem to be reflected in the prices on the markets.

Pro-factual factor #3: Their advent coincides with a period in which both monetary and fiscal policy are expansionary, which is not a healthy recipe for price stability. Nor is that any reason to expect the US Federal Reserve Board (Fed) to adopt an all-too-relaxed approach to monetary policy.

Pro-factual factor #4: Worth noting is the fact that the expectations of interest-rate hikes reflected in implied money market rates are not as high as the expectations of the members of the Federal Open Market Committee. So there is room for unpleasant surprises in the shape of a third rate hike in the course of this year. All the more so as the US economy is proving to be greater than assumed – post-factual.

Pro-factual factor #5: At the same time, global monetary policy – regardless of any US interest-rate hikes – remains expansionary and thus a key driver of investments in riskier asset classes, such as equities. The March meetings of the Fed, European Central Bank and Bank of Japan are not likely to change anything, either.

Pro-factual factor #6: Valuations in some parts of the equity market are already extremely ambitious (in the US, for example). They are moderate to inexpensive in Europe, and fairly low on average in emerging markets, as well.

On balance, equities should still form part of a portfolio, but expect volatility.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Hans-Jörg Naumer

Global Head of Capital Markets & Thematic Research
Hans-Jörg Naumer is Global Head of Capital Markets & Thematic Research with Allianz Global Investors which he joined in 2000. The focus of his work is on analysis relating to strategic and tactical allocations, specific investment opportunities and the identification of long-term investment trends. Before joining the firm, he worked for Société Générale, where he became the Head of Research Germany and was part of the French investment bank’s international research team. From his vantage point as an analyst and economist, he observed the establishment of the Economic and Monetary Union and thus ranked among the prime “ECB Watchers”. He started his professional career in the corporate banking division of Deutsche Bank in 1994. Hans-Jörg studied economics at the University of Mannheim, one of the leading universities for economics and business studies in Germany. During his studies, he worked at the Chair for Macroeconomics.
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