Outlook for China dollar bonds in 2025

The current universe of China dollar bonds is of higher credit quality than in 2020 

Since the Chinese property sector crisis sparked by the default of Evergrande Group in 2021 and the subsequent elimination of low-quality real estate bonds from the China dollar bond universe, the bond universe is now of higher credit quality than before. The 1-year volatility of the JP Morgan JACI China & Hong Kong Total Return Index was at 2.65% in 2024, 1% lower than in 2020 (Figure 1).

In terms of sector composition of the China dollar bond universe, the real estate sector experienced the largest decrease in percentage market capitalization over the four-year period, dropping from 25% to 8%, while the financial sector saw the highest increase, rising from 26% to 40% (Figure 2).

We believe China dollar bonds currently present an attractive value proposition

In our view, China dollar bonds currently present an attractive value proposition for both local and international investors for four main reasons.

1) Investors can access high quality corporate issuers that do not issue public corporate bonds onshore 

First, offshore USD bonds allow investors to access high quality Chinese corporate issuers that do not issue public corporate bonds onshore. Based on our observation, many high quality Chinese corporate issuers, especially private-owned entities, typically only tap the short-term commercial paper and the asset-backed securities (ABS) market for financing. As such, the offshore USD bonds create a valuable diversification option for these issuers. We outline two issuers with these characteristics in the below examples. 

• Example: A leading Chinese dairy manufacturer 

The first example of a bond in this universe is that of a leading Chinese manufacturing and distribution company of dairy products and ice cream, founded 30 years ago. The company is a listed on the Hong Kong stock exchange and is a component of the Hang Seng Index (HSI). While the firm does not have any outstanding corporate bonds in the domestic RMB bond market, it issued a USD bond in June 2020, with maturity date of June 17, 2025. It is rated Baa1 by Moody's. The bond offers a yield to maturity of 5.2% as of December 31^st, 2024.¹ Due to the high quality and scarcity, the performance of the bond has been quite stable over time.

• Example: One of the largest Chinese shopping platform companies for locally founded consumer products and services 

The second example is of one of China’s largest shopping platform companies for locally founded consumer products and services, including entertainment, dining, delivery and travel. This company leads the Chinese market for online food delivery and had a market share of 67.3% in 2024.² It is also listed on the Hong Kong stock exchange and is a component of HSI. The firm, which doesn’t have outstanding corporate bonds in domestic RMB bond market, issued a convertible bond in April 2021, with a coupon rate of 0% and a maturity date of April 27, 2028. The bond, which holds an international rating of Baa2 from Moody's, offers a yield to maturity of 4.9% as of December 31^st, 2024.³ The convertible feature also provides additional return upside for the security.

2) Higher yield from China offshore dollar bonds than onshore bonds for the same issuers

China offshore dollar bonds could also have a higher yield than onshore bonds for the same issuer in question. In the context of relatively high global interest rates, we outline two issuer examples where the yield on offshore dollar bonds issued by Chinese issuers is higher than that of onshore RMB bonds. 

• Example: Higher yield of China’s state-owned electric utility provider’s onshore RMB bonds versus offshore USD bonds

The first issuer example we consider is of China’s state-owned electric utility corporation and the largest utility provider in the world. As of March 2024, this company was the world's third largest by revenue. Major rating agencies such as S&P and Moody’s have rated the company A+/A1. For this high-quality issuer, offshore dollar bonds offer a higher yield to maturity compared to onshore RMB bonds. This allows investors to access the same issuer while achieving greater yield.

• Example: Higher yield of one of China’s “Big Four” banks’ onshore RMB bonds versus offshore USD bonds 

Another issuer example is that of a Chinese state-owned multinational bank headquartered in Beijing (one of the “Big Four”) that is also the fourth largest bank globally by total assets. The company is listed on both the A-share and H-share markets and is a constituent of the SSE 50 Index (A-shares) and the Hang Seng Index (H-shares). This issuer is rated A1 from the Moody's and A from S&P and Fitch. Like the earlier example, their offshore dollar bonds offer a higher yield compared to onshore RMB bonds.

3) China dollar bonds have lower volatility as compared to other fixed income asset classes

Over the past two years, the volatility of China dollar bonds has been the lowest among various major fixed income asset classes, including global aggregate, US treasuries, and US investment grade (IG) bonds (Figure 7). From the end of 2022 to the end of 2024, China dollar bonds had a volatility of 3.4%, which is even lower than that of the commonly used risk-free benchmark, US treasury bonds (6.3%). Both duration and strong technical support positively contributed to the relative performance. 

4) China dollar bonds are supported by strong technicals

Strong technical factors have recently supported Asian credit and China dollar credit market performance, which we expect to continue in the year ahead. Local demand, especially from Asian banks, has been a key driver behind the strong performance of Asian investment grade bonds. Chinese banks increased their foreign currency bond investment on a net basis by USD 33 billion in the first 11 months of 2024.⁴ On the other hand, net redemption (as bonds mature and are repaid by issuers) in Asia has averaged around USD 40 to 80 billion annually.⁵ With global investors’ allocation to Asian bonds currently at low levels, we expect the Asian credit market to remain well supported by favorable supply-demand dynamics.

Specifically, China dollar IG bonds benefit from strong technical factors, as evidenced by their spread performance when compared to peers. During periods of selloffs and spread hikes, China dollar IG bonds demonstrate relative stability and exhibit less volatility relative to peers. 

Growing importance of sustainable investing when evaluating China dollar bonds

As outlined in the earlier section, China dollar bonds present an attractive value proposition given the relative stability of these instruments and strong technical support. As global sustainability trends drive a shift in investment strategies towards more sustainable approaches, ESG has become an important topic within China bond investing. Evidence shows that despite some investors' concerns about potentially lower returns, sustainable investing can enhance risk-adjusted returns in China fixed income strategies. China dollar bond investors can therefore consider incorporating sustainable investing concepts into their portfolios.

Conclusion

China dollar bonds have shown resilience despite the market turmoil in the property sector in 2020. The bond universe has evolved since then and is currently of higher credit quality than before. We believe this asset class currently presents an attractive investment opportunity for investors. We are positive on China dollar bonds as they could provide investors with access to high-quality issuers and could offer higher yields compared to onshore bonds, alongside lower volatility and strong technicals. 

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.