Foreign investors see Chinese bonds as a safe haven while trade war rages

Chinese government bonds are offering increasing opportunity for foreign investors seeking a haven from the trade war storm, portfolio managers said. The tariff fight between Washington and Beijing has scored a direct hit on China’s stock markets and yuan currency, which have both fallen sharply this year. But steps China is taking to increase access for foreign investors to its less-tariff-vulnerable government debt, combined with some timely technical factors, is making for an attractive option, investors say.

Opportunity, according to Jason Pang, a portfolio manager at J.P. Morgan Asset Management in Hong Kong, lies in several factors. According to Pang, China’s bonds outperformed other Asian currency sovereign debt in the first six months of 2018 as domestic investors sought safety amid turmoil in stocks. And while overall foreign holdings of government debt is about 7 percent, low compared with other countries, outsiders have been increasingly jumping on board as seen in government bonds attracting net inflows of foreign cash even as investors have fled equities.

A key attraction for foreigners, Pang said, has been cheaper costs for hedging — or insurance against currency risk which protects, for example, U.S. dollar investors buying bonds denominated in the Chinese yuan. And Pang and other investors said China’s bond market is also in vogue because it is less correlated with other markets, meaning it doesn’t automatically move in lock step in times of turmoil. The world’s second-largest economy has been allowing more outside participation through a “connect” program with Hong Kong that allows purchases through the former British colony, now a semi-autonomous Chinese region.