China is defying the global bond yield surge, boosting haven appeal

BEIJING — Chinese government bonds can play an important role in portfolio diversification as they are likely to continue behaving differently from other countries’ debt, strategists say.

China’s yields have edged down in recent months even as benchmarks in the U.S., Japan and the U.K. surged to multi-decade highs. That reflects how the world’s second-largest economy remains insulated from global capital markets — and faces a deflationary environment, in contrast to inflation worries elsewhere.

“We see room for China bonds to outperform developed-market peers on a risk adjusted basis, with supportive macro policies and strong export growth to help support demand for central government bonds,” said Norbert Ling, head of fixed income portfolio management for Asia Pacific at Invesco. “CGB are still providing positive real yields, with defensive characteristics that have a role to play in global bond portfolios.”

China has been dealing with a severe property-market downturn and deflation, which has kept the People’s Bank of China accommodative. The country on Monday reported disappointing retail sales and industrial production growth for July, fueling hopes for more rate cuts and stimulus. That is likely to keep its bonds on a different path from those of other major markets.

“The latest July macroeconomic activity data from China came in weaker than market expectations, suggesting that domestic demand may take longer to recover,” said Chun Lai Wu, head of Asia asset allocation at UBS GWM Chief Investment Office. “We expect the PBoC to remain supportive through liquidity operations and targeted credit measures”

Chinese government bonds offer “valuable diversification benefits within a strategic multi-asset portfolio” for global and Asian investors, Wu added.

Charu Chanana, chief investment strategist at Saxo, agrees. Other major central banks like the European Central Bank and Bank of Japan have been hiking interest rates.

“For global portfolios, CGBs can still play a diversification role because China’s rate cycle is increasingly distinct from the U.S., Europe and Japan,” she said in an email.