The case for investing in renminbi bonds

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In a crowded, complex investment world, it’s not easy to find hidden gems that can provide real diversification benefits and an attractive yield. Yet for five solid reasons, we believe, Chinese renminbi bonds could be just what you’ve been looking for.

1. Overlooked
At over USD 4.8 trillion of outstanding debt (Q2 2014, Asia Bond Monitor) the renminbi-denominated debt market is the third largest bond market globally, yet it is largely overlooked by international investors. With very limited access points until recently, Chinese securities fell outside global benchmarks, but with financial deregulation in China advancing steadily, this is now rapidly changing.

2. Attractive yield
Renminbi bonds currently provide an attractive additional yield compared to other fixed income asset classes. The yield uptick of Chinese central government bonds (CGBs) over US Treasuries, for example, is now more than 200bp for offshore CNH CGBs and more than 350bp for onshore CNY CGBs (1). CNY bonds issued by local Chinese companies, often guaranteed by the government, provide an additional pickup of more than 100bp. CNH bonds issued by foreign companies, typically to fund their growing businesses in China, can offer yields that are 150-200bp higher than equivalent bonds in USD.

3. Low duration
Renminbi bonds currently combine an attractive yield with very low duration compared to other fixed income asset classes. The CNH bond market has a duration of 2-3 years versus that of the CNY bond market of 4-5 years. For both markets, the short end of the yield curve (issues with maturities of less than three years) couple very attractive yields with comparatively limited duration risk.

4. Strong currency
Analysts expect the renminbi to continue to appreciate with low volatility in the next few years. Since the end of the global financial crisis, the currency has risen steadily against the US dollar (2) and gained even more on major emerging market currencies on the back of China’s consistent current account surplus and the resulting demand for renminbi.

5. Diversification benefits
Within a typical portfolio, an allocation to renminbi bonds can provide diversification benefits and may reduce risk while increasing the return potential. The correlation of renminbi bonds with other global emerging market debt has been low, varying from 0.08 to 0.54. In our opinion, a portfolio of renminbi bonds can therefore offer attractive exposure to the high-growth Chinese economy, but with low volatility.

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(1) Bonds issued in renminbi outside of China are referred to as CNH bonds, CNH being the version of the RMB that is exchangeable for foreign currency outside China. Bonds issued in RMB within China are CNY bonds, where CNY stands for RMB exchangeable within China. CNH and CNY thus both refer to the same underlying RMB currency and tend to trade in a very tight bandwidth of one another.
(2) China’s ‘managed peg system’ has in effect controlled RMB/US dollar volatility. In recent years, the People’s Bank of China has started widening the band within which the RMB can trade against the USD, most recently raising it to 2.00%. Thus, the RMB should be more volatile than before, but it could still be years before market forces fully drive the currency.
Pieter Oyens

Head of Asian Investment Specialists

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