Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Why you should pay attention to the opening of China’s bond market
From this month, for the first time in history, one of the most followed global bond indices – the Bloomberg Barclays Global Aggregate Index – will contain Chinese government and high quality renminbi bonds. Investors might shrug their shoulders and say ‘so what?’
But we believe this news is very significant in two ways. Firstly, it underscores the Chinese authorities’ drive to integrate their economy into the global financial system. Secondly, it can help investors to diversify their holdings and seek out investments they had not previously considered.
China has opened its bond market to global investors because it needs investment to support its currency and finance new projects. Long gone are the days when China enjoyed massive surpluses as the world’s low cost producer.
The economy is now driven far more by domestic demand which is vulnerable to a weak currency. Opening its financial markets also means greater international use of the renminbi, cementing ties with trading partners and reducing reliance on the US dollar.
The inclusion supports an ongoing need for investors to diversify their portfolios. With interest rates still at rock bottom in the UK and across much of the rest of the world, the option to invest in high quality, higher yielding foreign bonds is an alluring prospect.
While this means that a UK investor will be taking currency risk, we believe the Chinese authorities are incentivised to keep the renminbi steady, if not slightly stronger, against a weighted basket of the currencies of their trading partners.
The HSBC RMB Fixed Income fund – as well as other similar funds available on the market – allow UK investors to take advantage of the attractive characteristics of Chinese bonds.
While investing in Chinese bonds may seem a scary prospect for many investors who are used to sticking to their home markets and familiar environments, we believe that this is another step in the ongoing evolution of global financial markets.
The difference this time is that China is by far the largest economy and market to ever integrate into the global financial system.
But just as we have quite quickly got used to China being an essential part of the global economy, so we believe that investing in Chinese assets will soon become mainstream and no one will question the wisdom of doing so.