Bonds

Market Turbulence Sparks China Onshore Bond Funds Surge

Falling domestic interest rates and anxiety about economic growth have driven local investors into China's bond markets.

Stock market turbulence has contributed to an explosive growth in bond funds in mainland China this year.

Chinese public bond funds’ total assets under management (AUM) grew 27% from January to September to a record high of 5.19 trillion yuan ($717.07 billion), data from the Asset Management Association of China (AMAC) showed. That was the fastest growth among the five asset classes tracked by AMAC.

Shanghai-based Colight Asset Management, one of the largest private bond funds in mainland China, saw its AUM expand by about 60% this year, reaching 20 billion yuan.

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Falling domestic interest rates and anxiety about economic growth have driven local investors into China’s relatively stable bond markets, fund managers said, with the bearishness on stock prices and earnings exacerbating the trend.

“I have to say it’s the poor performance of other assets that makes bond funds stand out,” said Jianqiao Feng, general manager of Colight Asset Management.

Seeking to make the most of this trend, Blackrock Inc launched its first bond-oriented fund in China on November 1. The fund invests primarily in fixed income, with a less than 30% equity exposure.

China has been an outlier this year as major central banks raised interest rates rapidly to fight inflation. The People’s Bank of China kicked off its easing cycle in December 2021 and cut its benchmark interest rates twice in 2022, thus propping up bond prices.

US-China Tensions Blamed

Meanwhile equities, traditionally popular among investors, have offered dismal returns because of negative factors such as simmering US-China tensions, as well as China’s frequent Covid-19 lockdowns and property crisis.

The CSI 300 Index has tumbled more than 20% this year, while the yuan is down 12% versus the US dollar.

In the six months to October, China’s onshore bond funds saw inflows of $73 billion, while equity funds faced outflows of $12.6 billion, according to Refinitiv data.

Sales of short-term bonds that mature within a year have boomed, with assets at domestic short-term bond funds up 85% this year.

“Given the sharp correction of equity funds since the beginning of the year and the lowered return of currency funds, investors have shifted to low- and medium-risk fixed-income products,” said Jinlong He, chairman of Youmeili Investment, a multi-asset manager based in Shenzhen.

Reuters with additional editing by Sean O’Meara

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Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.