With additional indices expected to include China’s onshore bonds in the coming year, fund managers may accelerate their investment decisions and allocations to this market. We expect future inflows to originate from 1) countries whose exchange rates tend to move with the renminbi, but that face a lower yield environment and 2) countries whose international trade and investment flows are increasingly linked to China with transactions that settle in renminbi. While government and policy bank bonds currently represent international investors’ main holdings, interest in credit bonds could grow as investors become more familiar with local credit markets, especially local credit fundamentals and bond pricing.
As China has become more integrated into global financial markets, its central bank and other policy makers have become more transparent in communicating policies and policy objectives, enhancing assessment of macro fundamentals and market direction. Macro conditions, regulatory measures and funding profiles have also led to distinct investment preferences among different investor types in China, which are important factors in market dynamics. We believe Invesco’s local presence and familiarity with China’s macro framework, policy nuances and unique market structure enable our team of investors to actively and effectively assess China’s onshore market, as we seek to achieve investment objectives for our clients.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
^1 Source: Foreign holdings of Chinese onshore bonds: CCDC, SCH, CEIC, Invesco, as of Dec. 31, 2019. Trading volumes: ChinaBond Watch from China Central Depository & Clearing Co., Ltd., as of Dec. 31, 2019. Index inclusion: Bloomberg announced in January 2019 that the Bloomberg Barclays Global Aggregate Index would include China’s government and policy bank bonds starting in April 2019 with a 20-month phase-in period ending in Nov. 2020. JPMorgan announced in September 2019 that it will add Chinese government bonds to its emerging markets local currency bond indices starting in February 2020.
^2 Source: PBoC, as of April 3, 2020
^3 Source: PBoC, Bloomberg L.P., as of April 3, 2020
^4 Source: CICC, as of April 7, 2020
^5 Source: International Monetary Fund, Currency Composition of Official Foreign Exchange Reserves Report, Dec. 2019.