China bonds sold in Europe may benefit onshore markets as well

Editor's Note: Jimmy Zhu is chief strategist at Fullerton Research. The article reflects the author's opinion, and not necessarily the views of CGTN.

China selling sovereign bonds in Europe, recently, widens the channels for foreign investors who are keen on adding their exposure to Chinese-related assets. At the same time, the moves may hint further increasing alignment between the local and offshore markets in the future.

China raised about $4.7 billion in a three-part deal in euros, which was worth equivalent to around of $4.74 billion, and split between 5, 10 and 15-year tenors. The five-year bonds were priced of a yield at minus 0.152 percent, while the 10 and 15-year tenors were priced with positive yields of 0.318 percent and 0.664 percent.

Those bonds are much more attractive than many other sovereign bonds in the region. The high yield offered is one of the reasons that attracted many investors in the region to subscribe to such securities. For example, thanks to the ultra-dovish monetary policy implemented by European Central Bank (ECB), the German 5-year government bond yield currently stands at minus 0.761 percent, offering a much lower yield than those bonds China issued last week.

When the bonds yield offered is below zero, most of the investors who buy those notes are not looking for earning the interest as they need to pay for the interest to the borrowers when bonds are priced at a negative yield. Thus, the reason they are owing those notes is to look for the price gains, and such hopes look quite real in the near term.

Even as the global economic activities rebounded substantially after worldwide policymakers implemented a large number of stimulus packages, eurozone inflation currently still stands below zero, far away from the ECB's "around 2 percent" target. Moreover, many European countries have restarted restricting measures to curb consumption and traveling activities due to recent surging COVID-19 infection cases.

The growth activities in the single bloc are set to take longer to recover, and many market participants expect the ECB to exercise more easing measures from 2021 onwards. In such a scenario, those bond prices denominated in euros are set for further gaining amid sustainable dovish monetary policies.

Besides the potential gains in bond prices, many foreign investors have been keen on exploring Chinese assets for years. Given more Chinese stocks and bonds have been added to the major international indices in recent years, asset managers have also increased their portfolio into Chinese assets. Furthermore, more capital inflows have been seen over the past two quarters after China effectively controlled the spread of COVID-19.

Still, Chinese assets owned by offshore investors are still in a relatively small portion at the current stage, issuing more notes overseas is not only offering more investment opportunities for European investors, but it may also benefit the local Chinese bonds market if more notes to be sold in the developed market in the future.

The current bond yield in China is much higher than most of those similar securities in developed markets. Hence, companies in China would pay for much lower interest rates if they choose to borrow in Europe. When China is likely to become one of the few countries that score a positive GDP growth in 2020 among the major economies, appetite to purchase the Chinese-related assets could stay overwhelming. More companies to issue notes overseas may also help influence the onshore borrowing cost lower, benefiting the local economy as well.

Over the past years, appreciation of the dollar was one of the major reasons that cause some foreign asset managers to refrain from holding yuan-denominated assets. But this factor doesn't exist for now.

Currently, various reasons have pushed the dollar index close to the lowest levels in more than two years. Even as the bonds issued by China last week was denominated in euros, which has been largely benefited by a falling dollar, as the euro weighs more than 50 percent in the dollar index. Moreover, the yuan's correlation with the euro over the past few years has been staying above 80 percent. Thus, buying euro-denominated Chinese bonds have similar risk exposure to buying yuan assets.

(Cover via CFP)