China Rout Prompts Rethink of How to Split Stocks and Bonds

A man stretches on the Bund as skyscrapers of the Pudong Lujiazui Financial District stand across the Huangpu River during sunrise in Shanghai, China, on Friday, March 20, 2020. Most of China is now considered low risk and should return to normal work and life, Premier Li Keqiang said at a government meeting on the coronavirus, which is spreading rapidly in Europe, the U.S. and elsewhere. Photographer: Qilai Shen/Bloomberg , Bloomberg

Chester Yung, Bloomberg News

Aug 5, 2021

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(Bloomberg) -- China’s regulatory clampdown is prompting global investors to reassess how they split their portfolios between stocks and bonds.

Offshore investors including Amundi Group are more cautious on the immediate outlook for Chinese stocks after a sharp selloff in the wake of the government’s move to rein in the country’s most powerful technology companies. While equities are cheap, many prefer the haven appeal of debt for now.

“With renewed risk aversion over regulatory clampdowns, Chinese bonds as safe havens should be in a better spot than equities,” said Chang Wei Liang, a macro strategist at DBS in Singapore.

The selloff in Chinese equities has coincided with strong gains in its sovereign bonds. That’s making stock valuations hover near the cheapest level since June 2020 relative to bonds, a strong lure for bargain hunters.

Data indicated global funds accelerated buying of Chinese government debt, with foreigners adding 50 billion yuan ($7.7 billion) of sovereign debt in July. That’s increased their holdings to a record 2.18 trillion yuan, data from ChinaBond showed. The purchases were nearly four times those seen in June after two months of slower buying.

Citing market uncertainty, Amundi, which manages around $2.1 trillion in assets, is also cautious on equities and has cut its exposure “meaningfully” since the beginning of this year, going from “very overweight to somewhat underweight China” in its regional portfolios, said Nick McConway, a London-based Asia ex-Japan equities portfolio manager. While he sees the potential for further declines he ultimately expects the correction to create long-term investment opportunities.

Despite the volatility, JPMorgan Chase remains overweight emerging-market equities, noting that Chinese stock valuations in affected sectors “are now priced at a substantial discount relative to history.”

In a separate note, JPMorgan analysts Tiffany Wang and Grace Ng wrote that any cheapness in government bonds has been eliminated by the rally in yuan rates after the cut in bank reserve requirements. Still, they also stick to their overweight view on bonds as an insurance against high odds that the growth outlook will weaken further.

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