How China’s $13-T bond mkt may be trade war winner


One of the less obvious beneficiaries of a resolution from the US-China trade war is shaping up to be the $13-trillion Chinese bond market.

China has already been welcoming record inflows into its local-currency debt after making it easier for foreign investors to access domestic securities and winning inclusion in a key global bond index. Now another hurdle is set to fall, should bilateral trade negotiations in coming weeks cement the deal that officials say is taking shape.

An agreement could help solidify expectations for a stable yuan exchange rate, removing any incentive China might ever have had to use it as a retaliatory tool; such concerns hurt the currency last year. It would also clear away the concerns of some investors about diversifying into Chinese debt amid a charged geopolitical environment.

“Evidence from conversations with clients suggests that any trade deal can only be a positive for Chinese bond inflow,” said Teresa Kong, a San Francisco-based portfolio manager at Matthews Asia. “Several major pension funds have been reluctant to pull the trigger, as their boards consist of union representatives and CIOs are reluctant to make the case for investment in China bonds as they view it a politically risky proposition.”

CIOs – chief investment officers – as a rule tend not to speak on record about political concerns with regard to China, but those worries have been apparent nonetheless. Monthly inflow to Chinese bonds topped out late last year, China’s sovereign dollar-bond offering in October saw diminished American demand.