In last month’s edition of Renminbi Compass, we identified a number of signs why the great bull market for Chinese bonds could well be coming to an end. Developments in April suggest that the asset class as a whole has further to run, even though convertible bonds and some Chengtou issues have performed poorly.
Clear outperformers in February included small and medium enterprise collective notes (SMECNs). These securities are medium-term notes (MTNs) where the risks to the investor are reduced through exposure to a group of unrelated companies and through guarantees.
Offshore renminbi (CNH) bond funds have produced steady returns this year on renewed enthusiasm for the Chinese currency. In the year-to-date, CNH-denominated or so-called dim sum bonds have risen more than 2%, outperforming Asian dollar bonds. We believe that an improvement in CNH liquidity, combined with a strengthening renminbi, will continue to provide a boost to dim sum bond funds this year.
Many of the trends that have dominated China’s fixed income markets over recent months continued in January. A general economic environment of low inflation and growing domestic demand was beneficial for a variety of non-government bonds. However, the key feature of the month was the very strong performance by convertible bonds, which participated in the continuing rally of the A-share markets (see chart 1).
For China’s financial markets, one of the defining features of 2012 was the massive flow of funds into bonds. As our Follow The Money analysis has highlighted for months, investor demand for bonds has drawn funds away from all other major asset classes (and, in particular, A-shares). The fairly modest (3.5%) rise in the CSI Aggregate Bond Index – the relevant benchmark for the entire bond market - suggests that this demand was basically met by supply, by the government and by other issuers.
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