China's bond market is gradually winning recognition from global investors, a trend accelerated by the renewed urgency in the global hunt for yield opportunities given the low interest rate environment, according to J.P. Morgan Asset Management's Global Fixed Income, Currency & Commodities Group (GFICC).
Today's China bond market has reached $14trn after rapid growth over the past two decades, making it the second largest fixed income market in the world. Its low correlation to other global bond markets offers investors a good source of diversification, while the potential for relatively high risk-adjusted return makes it an attractive income generator in a world awash in negative yielding bonds.
"Historically a small part of China's bond market, foreign participation is now growing on the back of the Bond Connect and index inclusion. However, it requires in-depth market knowledge and a laser focus on risk-adjusted returns to navigate this vast market," said Shaw Yann Ho, Head of Asia Fixed Income at J.P. Morgan Asset Management.
Historically a small part of China’s bond market, foreign participation is now growing on the back of the Bond Connect and index inclusion."
The China bond market is a complex ecosystem made up of three underlying sub-sectors - onshore RMB-denominated bonds (CNY), offshore RMB-denominated bonds (CNH) and offshore US dollar-denominated bonds, each with fundamentally different characteristics.
Shaw added, "Asset managers with insights and expertise in cross-border investing are better able to navigate the complexities and nuances of these sub-sectors and are best positioned to capture return opportunities despite the macro uncertainties."
To provide diversified access to China's vast fixed income market, J.P. Morgan Asset Management launched the JPMorgan Funds - China Bond Opportunities Fund earlier this year.
"The current low or even zero interest rate environment across developed markets has made it more challenging for investors to find yield opportunities, making the income potential of China bonds more appealing.
"The fund was designed and launched to meet this specific investor demand, seeking income flexibly across the entire China bond universe. The fund managers combine our top-down macroeconomic views and bottom-up fundamental research, with a focus on picking quality bonds," said Elisa Ng, head of China and Hong Kong Funds at J.P. Morgan Asset Management.
Benchmark-agnostic, the fund invests flexibly across the onshore and offshore China bond markets, and across corporate credit and government bonds, to capture diverse opportunities in varying market conditions. The portfolio managers take active currency positions to maximise returns. With a focus on quality, the fund allocates more than 50% of the portfolio to investment grade bonds at the time of purchase and has an average credit quality of BBB.
With a monthly distribution feature, the fund is available in USD, HKD and RMB Hedged classes to help meet investors' need for different currencies.