Offshore investors have been bailing from China’s onshore credit market for more than a year, but at least one foreign fund manager has turned positive in recent months.
(Bloomberg) — Offshore investors have been bailing from China’s onshore credit market for more than a year, but at least one foreign fund manager has turned positive in recent months.
Pictet Asset Management SA has boosted its holdings of domestic corporate bonds since late last year on valuation prospects as authorities began rolling back Covid-19 curbs, said Cary Yeung, the Swiss-based firm’s head of Greater China debt. Investment-grade notes underwent one of their worst-ever selloffs at the end of 2022, part of a shift by investors to riskier mainland assets like stocks. But such debt has strengthened so far this year.
“We have added exposure to onshore Chinese credits rather than rate bonds as we think this is where the opportunity is,” Yeung said in an interview. “China onshore bonds continue to offer stable and uncorrelated yield, and as such remain attractive as a portfolio diversifier.”
Global funds have steadily pulled cash from China’s onshore credit market since mid-2021 in light of the liquidity crisis in the property sector and sovereign debt sporting lower yields than the likes of US Treasuries. The government has rolled out a series of measures the past several months to support real estate, long a key part of China’s economic growth engine.
Foreign ownership of onshore corporates has fallen 19 consecutive months, with holdings over that time plunging 52% to 67 billion yuan ($9.8 billion) by the end of January, according to Bloomberg calculations based on data from the China Central Depository & Clearing Co. and Shanghai Clearing House. Overseas investors have also been retreating from other parts of the domestic bond market.
However, the annualized cost to hedge the yuan’s exposure to the greenback via forwards is hovering near a record low. Yeung favors selective onshore corporates whose yields post-hedging are higher than the same issuers’ offshore debt.
He was similarly bullish on Chinese government bonds last year, saying currency hedging made the notes more appealing to dollar-based investors. Now, Yeung expects the long end of the sovereign-debt curve to come under pressure as the economy gains momentum with Covid curbs lifted.
“Having said that, we get comfort that the accommodative monetary policy is not going to be turned around while inflation is still pretty much contained,” he added.
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