The Know:
Too big to ignore. China is the third largest sovereign bond market in the world, with a high quality rating and low government debt-to-GDP.
China Sovereign Debt Appears Attractive Relative to G7 Economies
China’s government bond market has grown from $1Tr in 2009 to over $5Tr, and has become the third largest after the US and Japan. The country is too significant for well-diversified investors to ignore. Additionally, China offers an attractive yield relative to major government bond markets for a comparably high credit rating and low government debt-to- GDP ratio. Finally, while foreign investor participation is currently low, Chinese policymakers are committed to financial market liberalization to improve market access, bond market depth and liquidity, which has led to global bond index inclusions.
Source: Bloomberg, Haver, and GSAM.
The How:
A major investment opportunity. China is set to become a sizeable proportion of key global bond indices.
Chinese Sovereign Bond Inclusion in Major Global Bond Indices
The inclusion of China Government Bonds (CGBs) in major global bond indices is a key milestone in the opening of the country’s capital market and a pivotal step toward China becoming a substantial component of a well-diversified fixed income portfolio. We anticipate potentially significant inflows from both active and passive investors benchmarked to these indices of c.$300bn if China is included in all three indices. We see China’s inclusion as a critical event. Excluding 6% of the Global Agg would be the equivalent of excluding a market of the size of France and could result in significant tracking error.
Source: Bloomberg, Goldman Sachs Global Investment Research, and GSAM.
Top Section Notes: As of November 30, 2019. Chart shows various characteristics of government debt for China and the G7 economies. ‘Debt-to-GDP Ratio’ is the ratio of government gross debt to Gross Domestic Product (GDP). ‘Credit Rating’ refers to Standard & Poor's ratings. Past performance does not guarantee future results, which may vary. Bottom Section Notes: As of November 30, 2019. For illustrative purposes only. Tracking error is one possible measurement of the dispersion of a portfolio’s returns from its stated benchmark. More specifically, it is the standard deviation of such excess returns. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.
