Against a backdrop of low-to-negative interest rates, Chinese government bond yields are looking like a better bet than those of other developed economies, says Western Asset Management.
In a white paper looking at the investment opportunities in China’s influence on financial markets, head of investment management Asia and portfolio manager Desmond Soon said China’s economic slowdown is good news for investors who are looking for ways to diversify their fixed-income portfolio.
“Western Asset firmly believes China’s economic deceleration will result in a ‘soft landing’ and investors should use China for good diversification and yield opportunities,” said Mr Soon.
“In a global environment with low-to-negative interest rates, Chinese Government Bond yields (currently at approximately 3 per cent for 10-year bonds) are more attractive than yields in other major developed economies,” he said.
According to Mr Soon, the opportunities are set to grow with the maturity of Chinese capital and currency markets.
“Investors will be able to successfully exploit attractive value opportunities in both Chinese onshore and offshore markets,” he said.
“At a size of US$7.4 trillion, China’s bond market is the third largest in the world. Despite this, foreign participation remains low at 1.6 per cent due to long standing quote restrictions imposed by China. This is expected to change following the recent policy relaxation, which will make the China Interbank Market almost fully accessible to foreign institutional investors, paving the way for sizable foreign inflows into the market over the long term.”
The impact of China’s slowdown on global economies will be mixed, Mr Soon said.
“China’s headline GDP growth will decelerate to 5 per cent to 6 per cent over the next few years, but the probability of a hard landing is low, as China’s per capita GDP is still at emerging market levels and the government has considerable policy levers to boost economic growth,” he said.
“China’s economic slowdown is both necessary and welcome, underscoring the transition of the economy from an investment-driven growth model to one based more on services and consumptions.”