(Yicai) June 11 — Chinese yuan-denominated bonds have become a stable asset to invest in a time when traditional safe-haven assets, such as the US dollar and US Treasury bonds, have been out for sale, according to the head of China Debt at Pictet Asset Management.
“Overall, we believe that Chinese yuan bonds are a low-volatility and stable asset,” said Yeung, who is also the co-head of emerging market corporate at Pictet Asset Management. “While local currency bonds from other emerging economies, such as India and Indonesia, may offer higher yields, they also tend to have greater volatility.”
Even though the yields on Chinese yuan bonds are not high, Yeung maintains a positive attitude towards them because China’s low inflation environment is expected to continue. He believes that a portion of institutional investors will view Chinese yuan bonds as a stable long-term investment asset class to include in their portfolios.
Chinese enterprises prefer to issue yuan-denominated bonds because US dollar bonds have relatively low interest rates, Yeung noted. Moreover, overseas investors have low holdings of Chinese US dollar bonds due to a generally cautious attitude towards Chinese yuan bonds.
But moving forward, considering both the Chinese macroeconomic situation and its developments in the technology sector, global investors will likely pay more attention not only to Chinese stocks but also to Chinese corporate bonds, Yeung predicted.
In the past 10 years, global investors purchased a large amount of US dollar-denominated assets, but moving forward, the diversification trend will prevail, Yeung said. This trend will have a positive impact on emerging markets’ local currency-denominated sovereign and corporate bonds, he added.
“In the short term, US dollar bonds may still have some allure due to their relatively high yields, which exceed 4 percent now,” Yeung noted. “But in the medium term — the upcoming one to five or even 10 years — market confidence in US Treasuries and the US dollar is expected to gradually weaken.”
Most emerging market corporate bonds are denominated in US dollars, as they are issued by companies based outside the United States. Therefore, if global investors aim for long-term portfolio diversification, they are likely willing to allocate some of their US bonds to US dollar bonds issued by firms in emerging markets, Yeung pointed out.
This way, investors can reduce the impact of tariffs because most Asian companies focus on the domestic markets, so their bonds are unlikely to have big exposure to large-scale exports to the US, Yeung explained.
Editor: Futura Costaglione