China’s bond market is the third largest in the world after the U.S. and Japan. There have been positive recent developments to open up the onshore Chinese bond market – The IMF approved the Renminbi (RMB) as global reserve currency in November 2015 alongside the EUR, USD, JPY, and GBP. A few months later the RMB bond market was opened to foreign investors (February 2016).
This allows investors to penetrate a new market with particular traits – In many cases, higher relative yield and lower duration than domestic markets providing a portfolio diversifier and yields in a yield starved environment, especially in continental Europe. It also allows Chinese local issuers to tap international bond investors.
The market, being relatively new to most international investors, requires tools for research, and benchmarking. FTSE Russell launched the FTSE China Onshore Bond Index Series in March 2015 with history back to 30 December 2011 to provide an independent benchmark on the Chinese onshore RMB bond markets. The index series offers data on both the sovereign bond market representing a market value of 5.3 trillion RMB (approximately $820 billion) as of February 29, 2016, as well as the Policy Bank bond market representing a market value of 7.5 trill ion RMB (approximately $1.1 trillion).
The following document intends to highlight and compare characteristics of the onshore China bond market by comparing characteristics of the FTSE Onshore China Bond Index Series and European government bond markets represented by the FTSE Actuaries UK Conventional Gilts, FTSE MTS Eurozone Government Bond IG Index, FTSE MTS France, FTSE MTS Spain, and FTSE MTS Italy indexes.
Yield and duration
Average duration in the China onshore bond market has remained stable at around the last four years (see the graph below), while the UK and continental government bond markets duration has increased over the period from December 30, 2011 to today.
Performance and FX Rates
The data demonstrates that total return from the onshore China bond market has been higher over the relevant period compared to France and the UK. Compared to Italy and Spain, total returns for the onshore China bond market have been lower, although the prices of the Spanish and Italian government bonds were depressed at the beginning of the period measured as a result of the government bond crisis in those countries. From 2013 onwards, the performance of these markets improved after the respective governments stabilized their policies and economies.
Currency exposure is a key component of risk/return and although not significantly different from the beginning of the period there has been recently more uncertainty as to the direction of the CNY/USD rate, especially with the devaluation of 1.9% on August 11, 2015, and 0.51% on Jan 7, 2016.
Correlation
Correlations within European markets is relatively high and has increased over the last three years.
However the correlation of the FTSE Onshore China bond index series to the Gilts market and Eurozone indexes has decreased and is hovering around zero.
Conclusion
The Chinese onshore bond market is still new to many investors and carries FX exposure, but the low correlation to European markets, shorter duration and higher yield as highlighted may interest certain market participants.
