Chasing the dragon – risks vs rewards of investing in onshore Chinese bonds

Chinese bonds have been included in a number of global fixed income indices that have a combined market value of c.USD5tn. This opens avenues for foreign investors looking for higher yields than just the over 1% offered in the US and the slightly over 0% and even negative yields offered by countries in Europe. China’s bond market is expected to attract substantial inflow of c.USD300bn (CNY2tn) given the attractive yields. Foreign investors’ net inflow was positive for 25 straight months until December 2020, with total inflow in 2020 surpassing a record CNY1tn.

Acuity Knowledge Partners (Acuity) provides bespoke services for its clients seeking investment research solutions. We offer a quick, flexible and scalable team to exponentially enhance our clients’ research requirements.

Key Takeaways

• Although Chinese bonds can be an important part of global portfolios, this investment segment has
  its own challenges. In 2020, the Chinese bond market saw defaults by state-owned entities
  (SOEs), raising questions regarding the pricing of risks in China’s debt market and the likelihood
  of it having a cascading impact on China’s debt market as a whole.
• A lack of credit differentiation by the domestic rating agencies and the use of the local language in
  most company accounts and disclosures imply that investors have to conduct their own credit
  analysis and also seek local expertise to fully understand the fundamentals before making
  an investment.
• An onshore partner such as Acuity can help effectively address these challenges. Our experienced
  credit research team has supported clients for the past 15 years. Our in-house credit research
  team in Beijing can work as a substitute to establishing an on-the-ground team for clients, bringing
  in not only local language expertise but also prudent and, more importantly, independent
  credit research capabilities.

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