Flows into Europe-domiciled China bond funds have nearly doubled over the past year and investor demand continues apace, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Over the past year, a number of fund managers have made moves to tap investor demand for China bonds. Net sales rose from €2.1 billion (US$1.4 billion) in 2019 to €6.2 billion in 2020, alongside assets under management (AUM) growth of 80% (to €18 billion).

“China’s economy has recovered to pre-COVID-19 levels. Its default rates have been lower than those in other markets and the renminbi has been a strong performer,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates. China’s fixed-income market has grown at more than 20% per annum to RMB110 trillion (US$16.9 trillion).

The high inflows to the China bond fund sector have been driven by the diverse range of instruments available, such as Chinese government bonds, policy bank bonds, and local government bonds. In addition, with index inclusion underway, China is catching up with developed markets such as the U.K. and Italy, where international participation rates are around 30% to 40%. Chinese government bonds could offer relatively attractive yields in local currency terms, with the benchmark 10-year government bond yield back to its pre-pandemic level of around 3.2%.

“Another key attraction could be the correlation benefits, which should add diversification to investors’ allocation. Onshore CNY bonds have low correlation with all the USD and EUR equities and fixed-income indices. Notably, in March 2020 when most major asset classes suffered from extreme market volatility, China onshore bonds remained relatively stable,” says Zumbo.

Zumbo notes that China is taking steps to ensure that local governments issuing finance vehicles are responsible for their own debt. “The goal is also to impose more discipline for corporate borrowers to avoid a repeat of the final months of 2020, when a wave of defaults had the knock-on effect of slowing investor fund flows, with the impact spilling into the broader credit market,” he adds.

Other Findings:

• The alternative sector reported net inflows of €1.6 billion in January, the strongest net inflows since July 2020. Derivative funds gathered the most inflows (€881 million), followed by commodity funds and infrastructure equity funds with €514 million and €251 million respectively. Specialty funds, which have been bleeding since October 2020, recorded net outflows of €118 million in January.

• During the six months ended Jan. 31, 2021, some 917 funds were brought to market, collectively gathering net inflows of €58.1 billion. Global equities was the best-selling sector, attracting €8.0 billion of inflows during the six-month period; the inflows came from 93 funds launched over the same period. Asset allocation funds was the second-best-performing sector in terms of inflows, gathering €7.2 billion. The worst-selling sector for newly launched funds was bonds alternative, which lost €835.9 million in outflows during the six months to the end of January.