(Bloomberg) – China’s faltering economy is proving to be a boon for the country’s government bonds, with a measure of institutional investor demand climbing to the highest level in almost a decade.
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Other positives for local debt include: sales of wealth management products are recovering from a slump late last year and household deposits are growing at a record pace, meaning banks are likely to allocate more money than ever to fixed income assets.
“As expectations for China’s economy have been impacted over the next five to 10 years, it is difficult for residents, businesses and financial institutions to increase their risk appetite,” said Li Yong, chief fixed income analyst at Soochow Securities Co. in Beijing. Market sentiment is even worse than it was during the epidemic, and cautious investors tend to put more money into bonds, he said.
China’s government bonds have largely weathered the recent slump in global fixed income assets, posting a loss of just 0.7% over the last month, despite the global government debt indicator falling 2.5%, according to Bloomberg indices.
One of the mainstays is likely to have been rising demand from insurance companies. According to the latest available data from the National Administration of Financial Regulation, insurers increased the share of Chinese bonds in their total assets to 43% in June, the highest since February 2014 and up from 39.7% a year earlier.
According to financial data platform PYSTANDARD, China’s bonds are also popular with companies offering wealth management products after investors poured 1.5 trillion yuan ($206 billion) into their funds in July. About 90% of fund holdings are typically invested in fixed income products, according to the platform.
The story goes on
Banks are also having to deploy more and more funds, some of which will find their way into government bonds. According to central bank data, household deposits rose by 11.1 trillion yuan in the first seven months of the year, up 11% from the same period in 2022. At the same time, new yuan loans fell to their lowest level in July since 14 years.
The authorities are also stepping up efforts to strengthen the country’s financial markets, urging pension funds and some big banks and insurance companies to boost equity investment.
All of the above factors have helped China’s benchmark 10-year bond yield surge as much as 2.54% this week, a level not seen since the pandemic began in April 2020. Some analysts assume that they will probably fall even further.
China’s 10-year yields are likely to fall towards 2.30% at some point, according to Citigroup Inc.
“If funding remains adequate and credit risks do not translate into a redemption and sell-off spiral, 10-year Chinese government bond yields could begin to decline,” strategists Philip Yin and Gaurav Garg wrote in a research note this week. Any more downside surprises in the data or disappointments related to non-monetary policy could accelerate the downtrend, they said.
– With the support of Tania Chen.
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