"The world's only safe haven, Chinese government bonds"

[Text / Observer Network Liu Bai] The outbreak of conflict in Iran has triggered a surge in global energy prices and rising inflation expectations. The outside world has noticed that major global government bonds have experienced concentrated sell-offs and sharp increases in yields, with only Chinese government bonds moving against the trend to form an independent market, becoming the only safe haven in this round of geopolitical turmoil.

The Financial Times of the UK published an article on April 1st stating that since the U.S. and its allies jointly provoked conflict with Iran, China’s 10-year government bond yield has slightly decreased to 1.81%, while the U.S. bond yield soared by 38 basis points to 4.34%, and UK government bond yields surged by 70 basis points. Behind this phenomenon is China’s long-term preparation to build strong resilience: diversified energy structure, ample strategic reserves, low and controllable inflation levels, and room for monetary easing; coupled with capital controls that lock domestic funds, low correlation with global bond markets, and policy certainty advantages, all support Chinese government bonds in maintaining resilience amid the global sell-off, attracting domestic and foreign capital allocations.

Bond yields and prices move inversely; rising yields mean falling bond prices. Since the outbreak of conflict, global bond markets have experienced large-scale sell-offs, with yields rising across the board. Many central banks are beginning to sell U.S. Treasuries to support their own economies and currencies. The scale of foreign central banks’ holdings of U.S. Treasuries at the Federal Reserve Bank of New York has fallen to its lowest level since 2012.

Year-to-date U.S. 10-year Treasury yield trend Macromicro

However, Chinese government bonds have remained resilient. As the world’s second-largest economy, China is becoming a safe haven against soaring energy prices and rising global inflation.

Investors generally expect that rising oil and gas prices will push up inflation, forcing major U.S. and European central banks to keep interest rates at higher-than-expected levels; meanwhile, China, with its energy structure advantages and pre-existing very low inflation, is relatively less affected by this round of shocks.

At the same time, constrained by capital controls and limited overseas investment channels for domestic investors, domestic buying continues to support Chinese government bonds, preventing them from being swept into the global bond sell-off wave.

Jason Pang, senior portfolio manager at J.P. Morgan Asset Management and head of Asia local rates and FX, said: “For investors like us, Chinese government bonds offer a highly uncorrelated, independent investment option.”

Analysts point out that the resilience of Chinese government bonds is also built on a long-term bull market.

In early 2014, their yields once exceeded 4.7%, but by early last year, they had fallen to about 1.6%. This long bull market once triggered market warnings of a bubble, and the People’s Bank of China repeatedly reminded that a sudden reversal in bond prices could threaten financial stability.

Investors believe that most European and Asian economies are highly dependent on energy imports and are highly susceptible to oil price shocks; whereas China’s energy structure is relatively diversified, with high proportions of coal and renewable energy, forming a natural safeguard.

Analysts believe that China’s large strategic petroleum reserves and its advantage in obtaining discounted Russian oil and gas further shield it from energy shocks. This impact is currently affecting neighboring countries such as South Korea, Japan, and Southeast Asia.

Mitul Kotecha, head of Asia FX and Emerging Markets Macro Strategy at Barclays Bank, said: “China is less affected by energy price transmission, and its economic starting point is completely different from other countries.”

“The position of the People’s Bank of China is also entirely different. We still expect China to have further room for easing, and its monetary environment differs significantly from other regions globally.”

In February, China’s Consumer Price Index (CPI) rose 1.3 year-on-year, reaching a more than three-year high, still well below the 2% policy target. Meanwhile, the domestic real estate market has been adjusting, the stock market experienced a deep bear market, and investment options are limited, prompting many investors to shift into government bonds.

Vincent Chung, fixed income portfolio manager at Puxin Group, said: “The ability of the Chinese bond market to better withstand shocks mainly lies in the fact that demand is ‘locked in’ by domestic funds.”

Strict capital controls limit residents’ outbound funds, causing Chinese bonds to perform relatively decoupled from other global bond markets. Wei Li, head of multi-asset investment at BNP Paribas China, said: “The Chinese bond market is relatively independent, mainly driven by domestic funds, which is completely different from the U.S. bond market.”

However, despite yields rising since early last year, Chinese government bonds continue to attract global investors.

Research firm Gavekal co-founder Charles Gave and Louis-Vincent Gave recently wrote in a report: “Since 2012, investing in Chinese government bonds has been one of the few ways for global bond investors to beat U.S. inflation.” “Meanwhile, other major bond markets have experienced significant real losses; markets in Japan, Germany, the UK, and others have even recorded nominal negative returns over the past 14 years.”

Some investors also prefer China’s monetary policy stability, contrasting it with the uncertainty of U.S. President Trump’s persistent pressure on Federal Reserve Chair Powell to cut rates.

Wei Li from BNP Paribas said: “The predictability of China’s monetary policy is very strong. When the central government requests a rate cut, the central bank implements it.” He added: “In contrast, Fed policy is full of uncertainty—whether the new chair will continue the policies after taking office is uncertain. The core appeal of bond investment is stability, and investors dislike this kind of uncertainty.”

Reuters also analyzed on April 1st that ample oil reserves and a highly resilient energy supply chain underpin the steady performance of China’s stock market, bond market, and RMB exchange rate. Asset managers and traders said this stability is beginning to boost market optimism about China’s economy and is prompting capital flows into technology and consumer sectors.

Reuters emphasized that in this turbulent month when investors have few safe havens, China’s counter-cyclical stabilization further reinforces the investment logic of holding Chinese assets—that is, for recently battered global portfolios, Chinese assets can serve as both a short-term safe haven and a long-term ballast.

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