Should we invest in Chinese bonds?
China is now the second largest economy in the world. This begs the question whether it will become a leading bond market. In other words, should we invest our money in Chinese bonds? Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income at ABN Amro Private Banking, discusses this in an edition of Pensioen Pro Live.
Pieterse-Bloem emphasises that China has made a very impressive development over the past 30 years, not only as an economy but also as a world power. However, besides this growth there is also lots of debt. Furthermore, the nature of the Chinese market is very different from what we know of our own markets. ‘A lot of the bonds are from policy banks’, Pieterse-Bloem explains. ‘So, these are banks that are very close to the state. And what they do is they lend money to other entities in China which are state-owned enterprises. So, the one thing you have to know about China is that in a way, everything is from the state.’
As mentioned before, China has lots of debt and a big part of this debt is held internally. This means that there is very little foreign ownership, only around 5%, which is very little compared to the global economy. However, we do see that this foreign ownership is incorporated more and more in the industries. Therefore, if you are investing in a global index, the chances are that it’s already starting to come into your portfolio. ‘To be specific, it’s in the Bloomberg indices, it’s in the family of JP Morgan indices, so be aware of that’, Pieterse-Bloem says.
Lately, there are many headlines about China which are worrying for investors. Think about tensions in Hong Kong and the beliefs that the period of super-growth in China is over. Is it still wise to invest in Chinese bonds given the current circumstances? 'As pension fund, if you decide to invest in China, you do that for the long-term. Pension funds have a long-term horizon so therefore they also need to invest with a long-term view. I think the key question is whether China can make its transition from the export-led economy that they are today to a consumer-led economy in the future. And also, whether China will be able to do that in its current form.’
China is a state-led economy after all, Pieterse-Bloem mentions. ‘With this state-led market capitalism, are they able to pull this tremendous transition that they’re trying to engineer off? Will they be able to balance growth with debt, balance adverse demographics with urbanisation and also transform the middle class? And are they able to do so in a sustainable way, since they’re facing huge environmental issues. I think that is the conversation pension funds need to have, because that is basically what you’re betting on in the long-run.’