China’s stuttering economy is proving a boon for the nation’s government bonds, with one measure of demand from institutional investors climbing to the highest level in almost a decade.
Among other positives for local debt: sales of wealth management products are bouncing back from a slump at the end of last year, and household deposits are rising at a record pace, meaning banks are likely to plow more funds than ever into fixed-income assets.
“As expectations for the Chinese economy in the next five-to-10 years have been hit, it is difficult for residents, companies and financial institutions to increase their risk appetite,” said Li Yong, chief fixed-income analyst at Soochow Securities in Beijing. Sentiment in the market is even worse than during the epidemic, and cautious investors tend to put more money into bonds, he said.
China’s government bonds have largely shrugged off the recent rout in global fixed-income assets, posting a loss of just 0.7% over the past month, even as a gauge of global sovereign debt has tumbled 2.5%, according to Bloomberg indexes.
One of the main supports looks to have been rising demand from insurance firms. Insurers boosted the proportion of their total assets held in Chinese bonds to 43% in June, the highest level since February 2014, and up from 39.7% a year earlier, according to the latest available data from the National Administration of Financial Regulation.
China’s bonds are also in demand from firms offering wealth management products after investors plowed 1.5 trillion yuan ($206 billion) into their funds in July, according to financial-data platform PYSTANDARD. About 90% of the holdings of the funds are typically placed in fixed-income products, the platform said.
Banks also have a growing pile of funds they need to deploy, some of which will find their way into government bonds. Household deposits jumped by $11.1 trillion yuan in the first seven months of the year, up 11% from the same period in 2022, according to central-bank data. At the same time, new yuan loans in July fell to the lowest level in 14 years.
The authorities are also ramping up efforts to bolster the nation’s financial markets, urging pension funds and some large-scale banks and insurers to boost stock investments.
All of the above factors have helped push the yield on China’s benchmark 10-year bonds to as low as 2.54% this week, a level not seen since the early days of the pandemic in April 2020. Some analysts say they are likely to drop even further.
China’s 10-year yields are likely to eventually fall toward 2.30%, according to Citigroup.
“If funding stays ample and credit risks do not materialize into a redemption-selloff spiral, then 10-year Chinese government bond yields may gradually drift lower,” strategists Philip Yin and Gaurav Garg wrote in a research note this week. Any further negative surprises in data, or disappointments around non-monetary policies may hasten the move lower, they said.
© 2023 Bloomberg
