HONG KONG: Chinese government bonds (CGBs) are poised to end the year with a small single-digit return, making them the best performers in 2022 among government securities in a worldwide benchmark index.
The gain, contrasting with losses by most others, has partly been driven by low inflation in China, fund managers said.
In local-currency terms, CGBs returned 2.66% in the 11 months to Nov.
30, ahead of the bonds of 23 other countries in the FTSE World Government Bond Index, data from fixed-income analytical service Yield Book shows.
CGBs achieved this outperformance even as foreign institutional investors cut their holdings of Chinese onshore bonds in every month from February to November, dumping a net 740 billion yuan ($106 billion) worth of the securities, according to data from China Central Depository & Clearing.
Fund managers expect the capital flow to switch direction, with money coming into China next year as US and European interest rates lose some of their relative strength.
That should further support CGBs. “With the US Federal Reserve slowing or pivoting from rate hikes in 2023, and negative factors in China such as (the) zero-covid policy phasing out, we will likely see a reversal of outflows next year,” said Freddy Wong, head of Asia-Pacific fixed income at Invesco.
Part of the outflow this year was due to the reversal of the previously higher yields of CGBs compared with US Treasuries.
China stocks flat, Hong Kong shares inch higher
Central banks in the United States and Europe have been raising short-term interest rates while China has been easing. Yields of 10-year CGBs have risen in 2022, but not by much: just 10.6 basis points so far, to 2.889% on Tuesday.
That compares with a rise of more than 200 basis points for 10-year U.S Treasuries.
In January, the yield on 10-year CGBs was 113 basis points higher than the yield on 10-year US Treasuries, but by November the Chinese bonds were 152 basis points behind.
Bond prices move inversely to yields.
For other countries in the FTSE bond index, returns had been dragged lower by higher US Treasury yields in 2022, said Edmund Goh, head of China fixed income at asset manager Abrdn.
But the Chinese market had responded to domestic drivers, including inflation that in recent months had headed lower, he said.
November consumer prices were up 1.6% on a year earlier in China and 7.1% in the United States.
In US dollar terms, CGBs ranked fourth this year, behind Malaysian and Singapore government bonds.
The yuan’s fall relative to the greenback was larger than some Asian peers’.
Mexican bonds did best in dollar terms amid local currency appreciation.
Some fund managers expect a rebound in China’s economy as it transitions out of zero-COVID.
That would support the yuan in 2023, making CGBs more attractive, they said.
“The recent policy changes on covid control and the property sector have led to continued outperformance of the yuan,” said Wong.
This year’s pace of outflow was unlikely to continue, he added.
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