China’s sovereign bonds woo buyers as central bank splits with world

Money managers are reigniting bets that the People’s Bank of China (PBoC) will ease within days just as the United States raised rates for the first time since 2018 – a split that’s set to boost Chinese bonds and broad developing-nation indexes, in which China can account for more than 50% of securities.

SINGAPORE: China’s debt is bouncing back after the worst foreign outflows on record, as investors refocus on its growing monetary policy divergence with the rest of the world.

While the sovereign bonds tumbled when Russia’s war with Ukraine sparked a broad pullback in risk, the securities have pared those losses.

Money managers are reigniting bets that the People’s Bank of China (PBoC) will ease within days just as the United States raised rates for the first time since 2018 – a split that’s set to boost Chinese bonds and broad developing-nation indexes, in which China can account for more than 50% of securities.

The prompts behind the turnaround? A worsening Covid outbreak that has spurred lockdowns, while investors are also seeking safer assets after a stock rout that only halted when officials promised to ease a regulatory crackdown.

Meanwhile, US Treasuries – usually the haven of choice to weather uncertainty including war – are getting hammered.

"We expect China government bonds to outperform global bonds" as monetary easing is likely needed to stabilise growth in the face of associated lockdowns, said Wilfred Wee, a Singapore-based portfolio manager at Ninety One Singapore Ltd.

"It is striking how differently yuan government bonds have been behaving relative to global bonds, reflecting their portfolio diversification ability." China is expected to continue easing, with a median of economists surveyed by Bloomberg expecting the reserve requirement ratio to be cut by another 50 basis points (bps) to 10.5% by the first quarter of next year, after a similar-sized reduction in December. By contrast, the Federal Reserve hiked 25bps last week, with the benchmark rate projected to end 2022 at about 1.90%. Policy rates in Poland, Hungary, the Czech Republic, Brazil and Chile are already above pre-pandemic levels, with elevated energy prices threatening to push them higher. Even policy makers in South-East Asia, the final bastion of record low rates, are expected to start hiking this year. China is on a different path, with slower-than-expected credit expansion in February and falling home prices imperiling Beijing’s commitment to achieve 5.5% annual growth. A fresh outbreak of Covid is only going to make that harder, already prompting the country to make a push to weaken the yuan through currency fixings. Citigroup Inc remains "overweight" on China bonds amid growth concerns. "The attraction of a dovish central bank at a time when almost all other central banks are hawkish will keep interest in China government bonds high," Citi strategists including Dirk Willer wrote in a report last week.

While officials in Shanghai have ruled out imposing a broad lockdown for the time being, lockdowns have been announced in Shenzhen and Langfang, a city near Beijing’s new airport.

Apple Inc supplier Foxconn had to initially halt operations at its Shenzhen sites, but restrictions were slightly eased on Friday in the technology hub. China’s bonds "should be anchored given the outlook for growth and the PBoC’s continued predilection to ease further," said Edwin Gutierrez, head of emerging market sovereign debt at abrdn in London.

Chinese bonds registered losses of just 0.4% since the invasion of Ukraine on Feb 24, while a Bloomberg gauge of 19 emerging-market peers has tumbled 2.9% over the same period. — Bloomberg