China’s domestic bond market has grown rapidly over the past decade to become the second largest in the world, yet foreign investor holdings remain low. This looks set to change. We expect foreign investor allocations to China fixed income to become more aligned with China’s share of global growth given financial market liberalization and global bond index inclusion. We also see scope for raised official reserve allocations to the renminbi and in turn to Chinese bonds.
From a diversification perspective, we think there is a compelling case for foreign investors to increase their allocation to China’s onshore bond market due to the low correlation between China government bonds and other sovereign bond markets. Chinese fixed income also exhibits low correlations with other Chinese assets such as equities. In addition, China government bonds provide attractive yields relative to macro fundamentals.