China remains the fastest-growing economic block. In the US and Europe, we are still trying to figure out whether output will return to pre-coronavirus levels next year or only in 2022. China surpassed this threshold already in the second quarter, and we only debate the rate of expansion, not contraction, for the current year.
China’s success is built on policies that quickly contained the virus during the first quarter and broke the link between rising mobility and new cases as the economy reopened. Unfortunately, incoming case numbers for Europe and the US show that the model is not easy to implement in Western societies. It is our long-held view that China’s economic model and growing influence in the global economy warrants a strategic investment in Chinese equities. We now extend this strategic view to the fixed income market.
As China’s focus shifts more inland, the central bank is not only liberating itself from US leadership, but is also becoming the pacesetter for a growing number of Asian economies.
China’s bond market is too large to ignore
A strategic investment in Chinese bonds is warranted for several reasons. China’s government bond market has become one of the largest in the world and is therefore included in a growing number of leading bond indices, which in turn improves liquidity and transparency. As outlined above, China’s economic policy follows its own agenda, as does the interest rate policy of the People’s Bank of China (PBoC). Up to the last decade, the PBoC has largely followed the lead of the US Federal Reserve (Fed), moving interest rates in sync with its most important trading partner.
As China’s focus shifts more inland, the central bank is not only liberating itself from US leadership, but is also becoming the pacesetter for a growing number of Asian economies. The inclusion of China’s bonds thus offers diversification benefits. Chinese government bonds with a five-year maturity currently offer yields that are about 250 and 340 basis points higher than US and German government bonds respectively.
What is going on in the markets? Julius Baer’s experts share their views.