(Bloomberg) -- While Chinese markets might look bleak at the moment, the biggest government bond selloff of 2021 has some investors salivating at a buying opportunity.
Risk aversion swept the country and spread globally this week after China cracked down on private-education firms, part of the government’s new curbs on the technology industry. Bonds were no exception.
And, yet, bulls including Ashmore Group and Alpine Macro are undeterred. The drivers that have made Chinese bonds the best performers in the world this year are still in place. Their higher yields, lack of correlation with other markets and China’s conservative deployment of stimulus should keep investors interested, especially since near-zero interest rates remain the norm around the world.
“The Chinese bond market is very resilient,” said Gustavo Medeiros, London-based deputy head of research at Ashmore, which oversees about $94 billion in assets. “Chinese bonds are the only major bonds in the world that will actually provide a proper protection in a global systemic event because it’s the only central bank in the world that still has a big bazooka. And Chinese bond yields are trading at a higher level than the European or U.S. bonds.”
China’s stock market has been hammered this week after President Xi Jinping’s sudden policy change on education companies -- which built on crackdowns on technology firms -- raised concerns that a swathe of industries may come into the crosshairs of regulators. The contagion spread to other assets Tuesday, sending the yield on 10-year government bonds up four basis points to 2.92% in the biggest selloff since November. The offshore yuan fell about 0.7%, weakening beyond the key 6.5-per-dollar level for the first time since April.
Tuesday’s selloff has been rare for a market that was seen as a magnet for foreign capital. Overseas funds net bought China’s government bonds in all but one month since the start of 2020, pushing holdings to an unprecedented level in June. Those flows helped drive 10-year yields down 23 basis points this year, the most among major markets. The rally accelerated this month after policy makers reduced the reserve requirement ratio for the first time in more than a year to support economic growth.
If the stock-market rout starts to tighten financial conditions and leads to an economic slowdown, the central bank may ease policies, which should benefit the bonds, said Medeiros.
Yan Wang, chief emerging-market and China strategist at Alpine Macro, concurred.
“The recent events shouldn’t have any long-term impact on the yuan or bonds,” said Wang. “China hasn’t done large-scale fiscal and monetary stimulus. Compared with the massive fiscal deficit and massive current-account deficits in the U.S., the yuan is fundamentally sound.”
©2021 Bloomberg L.P.
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