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 (JPMAM) global fixed-income, currency and commodities group.

Today’s China bond market has reached US$14 trillion 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 [programme that allows foreign fund managers to trade in the country’s debt markets without an onshore trading entity] and index inclusion,” says Shaw Yann Ho, JPMAM’s head of Asia fixed income. “However, it requires in-depth market knowledge and a laser focus on risk-adjusted returns to navigate this vast market.”

The China bond market is a complex ecosystem made up of three underlying sub-sectors – onshore renminbi-denominated bonds, offshore renminbi-denominated bonds, and offshore US dollar-denominated bonds, each with fundamentally different characteristics.

“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,” Shaw notes.

Elisa Ng, JPMAM’s head of China and Hong Kong funds, adds: “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.”