Depressed stocks drive explosive growth in onshore Chinese bond funds

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HONG KONG, Nov 8 (Reuters) – A turbulent stock market and loose monetary conditions have made bond funds in mainland China the most preferred investment this year, and perhaps the region’s best-performing asset.

Total assets under management (AUM) of Chinese public bond funds rose 27% from January to September to a record high of 5.19 trillion yuan ($717.07 billion), according to Asset data Management Association of China (AMAC). It is the fastest growing among the five asset classes tracked by the AMAC.

Shanghai-based Colight Asset Management, one of mainland China’s largest private bond funds, has seen its assets under management grow by about 60% this year, reaching 20 billion yuan.

Falling domestic interest rates and concern over economic growth have pushed local investors to China’s relatively stable bond markets, fund managers said, with falling share prices and earnings exacerbating the tendency.

“I must say that it is the poor performance of other assets that sets bond funds apart,” said Jianqiao Feng, managing director of Colight Asset Management.

Seeking to make the most of this trend, Blackrock Inc launched its first bond-focused fund in China on November 1. The fund invests primarily in fixed income securities, with equity exposure of less than 30%.

China was an exception this year, as major central banks quickly raised interest rates to fight inflation. The People’s Bank of China launched its easing cycle in December 2021 and cut its benchmark interest rates twice in 2022, supporting bond prices.

Meanwhile, equities, traditionally popular among investors, offered dismal returns due to negative factors such as simmering US-China tensions, as well as frequent COVID-19 shutdowns and China’s housing crisis. The CSI 300 index (.CSI300) has fallen more than 20% this year, while the yuan is down 12% against the US dollar.

In the six months to October, Chinese bond funds saw inflows of $73 billion, while equity funds faced outflows of $12.6 billion, according to Refinitiv data.

“Given the sharp correction in equity funds since the start of the year and the decline in the performance of currency funds, investors have turned to low and medium risk fixed income products,” said Jinlong He, chairman of Youmeili Investment, a Shenzhen-based multi-asset manager.

The investment strategy paid off.

The average return of domestic bond funds rose 9.74% in the first nine months of the year, according to fund distributor Simuwang.com, which tracks more than 18,000 onshore private funds, far outperforming other strategies of investment. Equity funds were the hardest hit with a 12.8% drop.

Sales of short-term bonds maturing within the year have soared, with assets in domestic short-term bond funds rising 85% this year.

Shenzhen-based Penghua Fund Management announced last week that it had raised 1.58 billion yuan in its new medium- and short-term bond fund.

Investments in short-term bonds this year could generate a relatively higher return than those in foreign currency bonds and bank deposit rates, Youmeili’s He said, while also providing liquidity. This has made short-term bond investing one of the most popular strategies in 2022, he said.

Colight’s Feng said most of the fund’s inflows this year have gone to its Tonghui No.1 fund, which focuses on fixed-rate bonds and low-risk corporate bonds, with a average portfolio duration of 1.86 years and without leverage.

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The challenge for these bond investors is that China is reluctant to lower rates further, for fear of a weaker yuan.

“We advise our clients to lower their performance expectations and seek certainty, everyone should come to terms with this reality,” Feng said.

($1 = 7.2378 Chinese yuan renminbi)

Reporting by Summer Zhen; additional reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Ana Nicolaci da Costa

Our standards: The Thomson Reuters Trust Principles.

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