Reflecting the popularity of renminbi-denominated investment instruments as a hot investment option, the market value of offshore RMB bonds alone has soared nearly tenfold in three short years.
These bonds are well received by institutional and retail investors and are especially attractive in current market conditions, given the increasingly globalised base of issuers, the bonds’ lower correlation than expected with China’s economic performance, and their lower sensitivity to fluctuations in US Treasury yields.
Issuers of offshore RMB bonds are no longer limited to the Chinese government and mainland enterprises. They also include a large number of global companies, financial institutions, state agencies and sovereign governments, together with well-established international blue-chip companies.
In terms of credit quality, HSBC Global Research reports show that most issued and outstanding offshore RMB bonds (including certificates of deposit) carry a rating close to investment grades.
Therefore, the year-to-date performance of offshore RMB bonds has been relatively stable despite earlier signs of a slowing Chinese economy and Beijing’s high-handed efforts to curtail over-lending.
The prices of these bonds are supported by the issuers’ global background and their stronger financial position and business prospects.
The Chinese government’s macro-control initiatives to stabilise the economy have added further to the performance of bond issuers with exposure to China.
Less affected by interest rates in the US
Generally denominated in the RMB (CNH) – that is, yuan traded on the Hong Kong market – offshore RMB bonds have a lower correlation with US interest rates.
The shorter duration also makes them less sensitive to fluctuations in interest rates.
For instance, during the months following the US Federal Reserve’s hint last May at a cutback on asset purchases, the wild fluctuations in US Treasury yields produced only a relatively mild impact on offshore RMB bonds compared with the performance of other bond classes, with some emerging-market bond price indices falling sharply.
The above bond markets are represented by the HSBC Offshore Renminbi Bond Index (CNH Index), the Barclays Global Aggregate Bond TR Index, the JPM US Aggregate Bond Index, the JPM EMBI TR Index, and the HSBC Asian USD Bond TR Index, the Barclays Global High Yield TR Index, and the JACI Non-Investment Grade TR Index.
Given the low correlation between offshore RMB bonds and other asset classes, HSBC recommends incorporating an appropriate level of exposure to offshore RMB bonds into an investment portfolio in order to benefit from the yuan’s expected upside potential.
Retail investors may consider consulting bond professionals with a thorough understanding of the Chinese market and a proven track record to explore desirable investment opportunities in this area.
Bonnie Lam is managing director and head of wholesale business, HSBC Global Asset Management Ltd, Asia-Pacific.