The prolonged use of capital controls is incompatible with the goal of achieving reserve currency status in the long run, but we do not see a shift away from a controlled exchange rate in the near future.
Relative Value
Chinese bonds may have a greater yield than equivalent bonds issued in industrialized bond markets, but not when compared to the average emerging market. When compared to the average emerging market, this indicates the comparatively low volatility of both bond prices and currency.
Both the central bank and the State Council, which oversees China’s huge bureaucracy, have expressed support for a more moderate monetary policy. This, we feel, marks the start of a longer period of reduced interest rates, which might be beneficial to bonds.
However, in the medium and long run, China’s growth is anticipated to outstrip that of the United States and Europe, necessitating fundamentally higher Chinese interest rates to combat inflationary pressures. It should be noted, however, that China’s economic and interest rate cycles do not usually follow those of the United States and Europe. This explains why the US and European markets have such poor connection.
Chinese 10-year government bonds will pay out roughly 3.6 percent to investors, while 10-year policy bank bonds will pay out around 4.3 percent.
5 On 10-year sovereign paper issued by governments in developed markets, that’s an appealing yield increase.
Is it wise to invest in Chinese bonds?
China’s bond market has grown to become the world’s second largest1 thanks primarily to domestic investors. As Chinese assets are more represented in prominent global benchmarks for stocks and bonds, the next stage of their development should see more diverse ownership and a greater alignment with international standards.
Income-seeking investors should examine China bonds to provide potential diversification benefits and increased robustness to a global portfolio in this low-for-longer interest rate environment. China bonds, on the other hand, have smaller correlations to global risk assets and offer greater yields with reduced volatility. This is particularly critical during periods of high market volatility.
What is the current rate of interest on Chinese bonds?
As Beijing eases policies to accommodate a faltering economy, the price of Chinese government bonds has risen. As a result, yields, which move in the opposite direction of prices, have fallen, with the yield on the benchmark yuan-denominated 10-year bond falling to 2.72 percent.
What are the terms for Chinese government bonds?
The Chinese central government issues and backs CGBs. PFBs, also known as policy bank bonds, are issued by China’s three policy banks (China Development Bank, Agriculture Development Bank, and Export-Import Bank), but they have the same credit quality as CGBs because they have the explicit funding support of the People’s Bank of China (PBOC) in times of need. As a result, CGBs and PFBs trade in a similar manner, with pricing discrepancies primarily reflecting…
Is there a bond market in China?
According to Wang, China, which issued about 7 trillion yuan ($1.10 trillion) in treasury bonds in 2021, confronts a number of concerns, including the pandemic, global inflationary pressures, and uncertainty related to the Federal Reserve’s tapering.
The government of China will issue a record amount of treasury bonds next year, as a huge number of bonds will mature, and the government will continue to pursue a proactive fiscal strategy.
Wang said the Ministry of Finance will work with other government agencies to ensure there is enough market liquidity to enable a smooth issuance.
China will moderately raise the share of short-term treasury bonds in its issuance in 2022 to drive overall rates lower as interest payment responsibilities from maturing bonds expand next year, he added.
Furthermore, China will restructure the administration of treasury bond maturity dates in order to calm market expectations and assist institutions in better managing liquidity.
Treasury bond yields are expected to play a larger role as a benchmark for other sorts of borrowings, according to the government.
Wang stated that China will promote and direct more mid- to long-term foreign capital into the Chinese bond market, as well as keep Chinese debt for extended periods of time.
According to Wang, foreign ownership in Chinese government bonds have been rising for 11 quarters and now account for 2.4 trillion yuan, or 11% of the market.
What if China stops purchasing US debt?
If China (or any other country with a trade surplus with the United States) stops buying Treasurys or even starts selling its US FX reserves, its trade surplus would turn into a trade deficit, which no export-oriented economy wants since it will be worse off.
Are Chinese government bonds safe?
‘Higher Quality Growth’ is a phrase used to describe growth that is of higher quality. As the world’s second-largest bond market, Chinese debt serves as a “alternative safe haven” for Tracy Chen, a Philadelphia-based portfolio manager at Brandywine Global who purchased Chinese debt for the first time in 2020.
Which Chinese bond market is the most developed?
The Chinese onshore local currency bond market is the largest. These are renminbi-denominated bonds issued in mainland China. This is the largest of the three submarkets, with a total value of $17.5 trillion. The majority of Chinese government and policy bank bonds are issued in renminbi on the mainland.
What are offshore Chinese bonds?
Simply described, China offshore bonds are dollar-denominated bonds issued by a HoldCo in the Cayman Islands or the British Virgin Islands. These HoldCos have no assets other than shares (common equity) in operational enterprises based in mainland China. These OpCos are the ones who actually hold the company’s assets and conduct operations.
As a result, any debt issued at the OpCo level is fundamentally subservient to the holders of HoldCo bonds. And, as you might think, OpCos do issue debt. They issue debt in the form of onshore bonds, secured loans, and all other types of unsecured claims that any firm will accumulate as a result of its usual operations (all of this onshore debt is obviously RMB-denominated, not dollar-denominated).
Note: If you’re not sure what the difference between HoldCo and OpCo is, see this post on structural subordination.
I’ve built together a tiny diagram to show you where onshore vs. offshore debt is located:
Note: The funds needed to repay HoldCo coupon holders originate from dividends paid by OpCos, which are subsequently passed on to the HoldCo. Alternatively, an intracompany loan, rather being an equity investment by HoldCo into OpCo, is often used to establish a connection between the HoldCo and the OpCo, in which the HoldCo passes on bond proceeds and the OpCo passes back up proceeds for coupon payments.
Remember that, other things being equal, you want to be closer to the assets as a creditor. However, with offshore debt, you’re as far removed from the OpCo’s actual assets as you can get because you’re dealing with a HoldCo based in a different nation and unable to obtain true upstream guarantees as they’re commonly understood and applied.
If you’ve read the Restructuring Guides, you might be asking what exactly prevents the offshore bonds from being primed (having lots of onshore debt being issued, which will have a higher priority than the HoldCo debt).
It’s an excellent question! “The credit papers say there will be some type of constraint on the amount of onshore debt that will be raised,” says the hand-wavy response.
While I’m trying to keep this piece short and sweet, if you’re dealing with a restructure in the United States, you’ll hear the term “basket capacity” a lot. All this entails is determining how much extra money can be allocated to a specific level of priority based on the existing credit documents.
This is a black-and-white regulation. If the debtor can only raise $100 million in secured debt, a series of adjustments to current credit documents (which creditors are unlikely to agree to) will be required to acquire further secured capital.
The point I’m trying to make about offshore bonds is that, while they have similar language to typical credit documents, their practical enforceability is questionable. Because it’s difficult to determine how much debt OpCos have to begin with (for example, private construction loans or modest unsecured debt issuances), and because there’s no evident time-tested venue where offshore holders might try to prevent OpCos from raising onshore funds.
While there are legal ways to avoid being primed or having no influence in a reorganization – particularly if the firm has assets in the United States, the United Kingdom, Canada, or elsewhere – the main technique is through a quasi-political influence. Essentially, by persuading the debtor that if they treat offshore holders unfairly, the debtor’s access to the offshore funding market will be cut off for good.
This may appear to be a bad card to play in a restructuring negotiation, but it’s not so bad because most prominent Chinese property developers are heavily reliant on the offshore bond market, as we’ll see below.
What is the size of China’s bond market?
The Chinese economy is a behemoth, and its bond market is a rising powerhouse. The Chinese bond market was the world’s second-largest by the end of 2020. Chinese bonds were worth approximately $19 trillion in total, accounting for 15% of the global bond market.
How much does the United States owe China?
Ownership of US Debt is Broken Down China owns around $1.1 trillion in US debt, which is somewhat more than Japan. Whether you’re an American retiree or a Chinese bank, you should consider investing in American debt. The Chinese yuan is pegged to the US dollar, as are the currencies of many other countries.