Investing in Chinese Bonds


Adding Chinese Bonds to Income Portfolio

Chinese Yields are High Relative to the World

The 10-year Chinese government bond yield is 3.55%.

Compare that to the U.S. at 2.97% or Germany at 0.63% or Japan at 0.04% and it makes sense why these bonds are attracting more attention.

China Is Becoming More Integrated into the Global Monetary Policy System

Part of the appeal of Chinese bonds is that I think China is doing several things that will help their bonds and their currency (relative to the U.S. dollar) over time.

  • They are now part of the IMF’s Special Drawing Rights (SDRs). While SDRs are not useful to us as individuals, they are important for central banks and sovereign wealth funds who often target holdings with SDRs in mind.  China’s commitment to growing their weighting in the SDR is a positive for these types of bonds.
  • China is becoming more important in terms of a "reserve" currency elsewhere. Not only are their anecdotal stories of China working with central banks and sovereign wealth funds to hold more Renminbi/Yuan denominated assets, they have started trading oil futures directly in Renminbi/Yuan – breaking the need for interested parties to trade oil exclusively in USD.
  • China will likely issue more bonds in their effort to become more mainstream. While normally supply would weaken bond prices, I think supply of Chinese debt will have opposite effect in coming years.  As they issue more debt and develop a full curve, more international investors will focus on Chinese bonds, increasing their liquidity and creating demand.

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