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Chinese Government Bonds: Temporary domestic technical headwinds offer springboard for greater foreign participation
15 September 2020
Despite the numerous attractions of Chinese government bonds (CGBs), foreign investors still own relatively little. Index providers were initially slow to include China in key indices, but this is now changing and foreign demand for Chinese fixed income is rising sharply and likely to continue to grow, in our view. As they seek to increase their overall exposure to China, tactically foreigners need to pay particular attention to technicals in the Chinese local market, since the direction of the Chinese bond market is entirely set by locals. The local bond market in China is currently experiencing an interesting – and transitory – imbalance between demand and supply, which is pushing up yields. While this hurts local investors, who are very long CGBs, it also creates an interesting opportunity for foreign investors with very little exposure to CGBs add to their inadequate positions at attractive yields.