UBS Asset Management communication meeting revealed: China's bond market will be a global capital "money magnet"

On August 12, Guilin, the head of UBS Asset Management's Asia Fixed Income Portfolio, appeared at a communication meeting to discuss the outlook for the Chinese bond market.

Zhi Shi Tang noted that as the head of UBS's buy-side, Guilin emphasized that the onshore RMB bond market has rapidly developed into the world's second-largest bond market, but many international investors have yet to fully recognize this fact.

He further emphasized that the low correlation and low volatility of the Chinese bond market are among the core reasons it is favored by international investors. "The large and open characteristics of the Chinese bond market make it an important candidate market for non-US dollar asset allocation."

UBS's latest survey targeting central bank clients from multiple countries shows that many central banks have continued to increase their holdings of RMB and euro assets this year, further confirming that the trend of global non-US dollar asset allocation is deepening. RMB assets, especially RMB bonds, have become a priority for international investors.

RMB Bond Market Rises to Second Place Globally

Over the years, we have observed that although the onshore RMB bond market has rapidly developed into the world's second-largest bond market, second only to the United States, many international investors have yet to fully recognize this fact. The enormous scale of this bond market is a significant reflection of the vast size of the Chinese economy. For global investors, this market is undoubtedly a strategically significant and valuable asset class for allocation.

In the past decade, the Chinese bond market has maintained an extremely fast growth rate. The market size has expanded from less than 10 trillion RMB a decade ago to approximately 25 trillion RMB today, with the growth rate closely linked to the rapid development of the Chinese economy, demonstrating strong vitality and broad growth potential.

The RMB bond market is mainly composed of two major segments: interest rate bonds and credit bonds. Data shows that interest rate bonds account for about two-thirds of the RMB bond market, while credit bonds account for about one-third, forming the current market's main structure.

In recent years, the openness of the domestic bond market has continued to increase. Since the opening of the "Interbank Bond Market (CIBM)" channel in 2016, the facilitation of foreign investment channels has been continuously promoted, followed by the gradual introduction of new channels such as "Bond Connect," and the gradual removal of investment quota restrictions, making it more convenient and flexible for international investors to invest in the Chinese bond market.

Another important factor driving foreign investment in Chinese bonds is the inclusion of Chinese bonds in major global bond indices, including the Bloomberg Global Aggregate Bond Index, JPMorgan Global Government Bond Index, and FTSE Russell World Government Bond Index. The weight of Chinese bonds in these indices has gradually increased from about 6% to nearly 10%, significantly enhancing the share of RMB bonds in global fixed income asset allocation.

Global Capital Strengthens Index-Based Allocation of Chinese Bonds

The index inclusion event has prompted a large number of index-based investors to begin increasing their allocation to Chinese bonds. Data shows that at the beginning of 2018, foreign holdings of Chinese bonds were approximately $200 billion, reaching as high as $600 billion in 2022, indicating a significant shift in asset allocation.

Behind this wave of foreign capital increase, in addition to index inclusion, it is also related to the global macro environment at that time. From 2019 to 2021, large-scale fiscal and monetary stimulus in the United States raised concerns about the future trend of US Treasury bonds, while Chinese bond yields showed a clear advantage, becoming an important choice for investors to avoid risks and seek returns Starting from 2024, international investors are accelerating their allocation to Chinese bonds again. Confidence in dollar assets has declined due to multiple uncertainties, prompting some investors to shift their assets to non-dollar markets, including Chinese bonds.

"The large and open characteristics of the Chinese bond market make it an important candidate market for non-dollar asset allocation," emphasized Guilin.

Foreign Investment in Chinese Bonds Enters a New Phase

Looking back over the past fifteen years, foreign investment in Chinese bonds has gone through several stages. As early as 2010 to 2013, during the initial phase of RMB internationalization, foreign investment allocation had already seen significant increases, especially with the rise of the offshore RMB bond market (dim sum bonds). After 2018, with the accelerated opening of the domestic bond market and index inclusions, foreign investment allocation entered a rapid growth phase.

UBS, as a key promoter of offshore investors allocating RMB bonds, has always actively cooperated with market opening and international demand, continuously deepening investment experience, particularly with significant promotional effects in the European and American markets.

In addition, the low correlation and low volatility of the Chinese bond market are among the core reasons for its popularity among international investors. Data shows that the correlation of Chinese bonds with the bond markets of developed countries such as the United States, the United Kingdom, Switzerland, and Japan has long been close to zero, and even exhibited negative correlation during certain periods. For example, from 2022 to 2023, the U.S. interest rate hike cycle led to rising U.S. Treasury yields and pressured bond prices; meanwhile, Chinese bonds, being in a rate-cutting cycle, showed strong performance, with a clear divergence in trends.

From the perspective of modern portfolio theory, allocating low or negatively correlated assets helps enhance the overall portfolio's risk-adjusted return and reduce portfolio volatility. This makes Chinese bonds an extremely attractive diversification tool in global fixed income asset allocation.

Chinese Bonds Maintain Low Volatility Levels

In terms of volatility, the Chinese bond market has long maintained a low volatility level of about 2%, far below the 6% to 8% volatility range of developed markets such as Europe and the United States. Low volatility means lower market drawdown risk, which is particularly important for risk management.

Looking at the total return performance over the past five years, the domestic RMB bond market not only has low volatility but also consistently achieves positive returns.

Considering exchange rate factors, some overseas investors have not hedged against RMB exchange rate risks, yet the Chinese bond market still outperformed the U.S. bond market, demonstrating its investment value and robustness.

Non-Dollar Asset Allocation

In recent years, with the complex changes in the global macroeconomic and geopolitical environment, an increasing number of international investors have expressed doubts about their confidence in dollar assets. Since the beginning of this year, investors have been seeking to reduce their reliance on dollar assets through diversified asset allocation, shifting funds to non-dollar assets.

Against this backdrop, RMB assets, particularly RMB bonds and stocks, have become a natural and important allocation direction. The trend of non-dollar asset allocation not only helps to diversify investment risks but also provides solid support for the stability and appreciation of the RMB bond market and the RMB exchange rate.

UBS's latest survey targeting central bank clients from multiple countries shows that many central banks have continued to increase their holdings of RMB and euro assets this year, further confirming that the trend of non-dollar asset allocation is deepening globally Renminbi assets, especially renminbi bonds, have become a priority for international investors.

As the world's second-largest bond market, the renminbi bond market is not only large in scale and has good liquidity, but it is also highly attractive from the perspective of risk-return and asset allocation. In light of the current trend of international capital flows towards non-U.S. dollar assets, foreign investment in renminbi bonds is expected to usher in a new round of growth