With the Federal Reserve's interest rate hikes and balance sheet, as well as the concern on the trade frictions, the turmoil in the U.S. market has triggered shock in the global financial market. The bubble in the U.S. stock market has discouraged capital, while Europe and other emerging markets have been in a downturn and turmoil due to various factors; while the Japanese market is stable yet there is hardly any progress. According to a study published by Deutsche Bank, as of the end of October this year, in the global financial assets tracked by the Deutsche Bank for a long period of time, up to 89% of the global financial assets (in US$) year-to-date return on investment is negative. It can be seen that the world is facing valuation adjustments and market turmoil under the background of liquidity tightening. It appears that the global market is still facing capital surplus, and it seems to be hard to find a safe capital haven that guarantees the returns. In this context, the global capital market is in urgent need of an "oasis" of relative security and stability.
Anbound has previously pointed out that an important reason for the current global capital market turmoil is the Federal Reserve's interest rate hike, and another reason is the United States-sponsored global trade "chaos." Although the United States is an important "perpetrator" in this turbulent world, the U.S. capital market is the biggest beneficiary of market turmoil. The global market is like a fish pond, while the United States is a reckless fisherman who uses bamboo poles to stir the pond and drive the scared fish (that is, funds) to the relatively calm part of the pond (the U.S. market). Due to the excess liquidity caused by quantitative easing after the financial crisis, the world today is still experiencing a capital surplus. At this time, if the relative security and stability of the U.S. market are highlighted, global capital will inevitably enter the US stock market in order to avoid risks, which also makes the U.S. stocks the only market that continues to rise in 2018. Judging from the strong performance of the U.S. capital market since the financial crisis, this is the "dividend" paid by the world of capital surplus to the U.S. financial hegemony.
However, the financial hegemony dividend will not last forever. The capital market has expressed deep concern on the shrinking global liquidity caused by the Federal Reserve's interest rate hike. In addition to triggering international capital dumping the emerging markets, investors' concerns about risks and yields have spread to the U.S. market, where asset valuations are too high, has caused violent turmoil in the U.S. stocks since October. In the past, the technology sector, which has led the U.S. stock market for a long time, has also entered an unknown adjustment period under the decline of Apple. It appears that the U.S. market is gradually losing its appeal to international investors.
Zhou Hao, a senior emerging-market economist at Commerzbank, believes that in the context of the difficult rise in the yield of the U.S. Treasury bonds, there could be a risk in asset price revaluation, and such situation has emerged in emerging markets. It has brought about a considerable degree of market turmoil. He warned that the greater impact on the market is the pressure of asset revaluation from developed markets. Such a revaluation may result in severe liquidity depletion and stampede effects. The rise in the U.S. dollar interest rate may accelerate the outbreak of this risk to a large extent. On the other hand, historical experience also proves that it is more dangerous than the risk itself to ignore and not understanding the risk. This is also one of the trigger points for the outbreak of the "black swan event".
Therefore, international capital is eager to find a market that can both hedge and provide appropriate returns. In this case, China's bond market is likely to become a good option for international capital. Can the Chinese market become an "oasis" favored by international capital? The bleak performance of the Chinese stock market can easily lead to market suspicion. We believe that although the Chinese stock market is messy, from the perspective of the global market, China's capital market still has the potential to act as an "oasis", and its bond market is a market with great potential.
First, although China's economic growth is slowing down, it still maintains a relatively high growth rate among the major economies. Although the RMB exchange rate has depreciated against the U.S. dollar, it is still relatively strong among the major non-U.S. currencies. If the potential and space of the Chinese market are taken into account, RMB assets are still attractive to foreign investment. This is especially true after the recent adjustments, which make the Chinese market more attractive.
In recent years, international capital has continued to purchase Chinese bonds; even after the market's drastic fluctuation in 2017, it did not affect the enthusiasm of foreign investors to increase their holdings of RMB bonds. According to the monthly report of Chinabonds, as of the end of October 2018, the amount of bond custody of overseas institutions was RMB 1,442.552 billion, a record high, and has increased for 20 consecutive months since March 2017. Although the increase in custody volume has shrunk in recent months, it can be considered that this is a rest period for foreign-invested RMB bonds. However, in the long run, there should not be major changes in the trend of RMB asset allocation.
Second, the world's major bond index is considering the inclusion of Chinese bonds, which reflects the increasing recognition of the international investors in the Chinese bond market, which will attract more foreign investment into China's bond market in the medium and long-term. In March 2018, Bloomberg reported the inclusion of RMB-denominated Chinese government bonds and policy bank bonds in the Bloomberg Barclays Global-Aggregate Total Return Index. The Citi Chinese Broad Bond Index and the JP Morgan Chase Emerging Market Index also indicated that they would consider including RMB bonds in the statistics. This provides a reference and target for international investors to enter the Chinese market. According to estimates by Haitong Securities, if Chinese bonds are included in all three major international bond indices, it would bring in a total of about US$ 265 billion of capital inflows, equivalent to about RMB 1.7 trillion.
Third, the Chinese bond market still has great potential for development and there is room for international capital to enter The Goldman Sachs research report pointed out that as the Chinese market is open to the outside world, the size of China's bond market may nearly double to about RMB 146 trillion in the next four years, while the proportion of foreign-held mainland bonds is expected to be at the end of 2022, from the current about 8% to about 22%. This means that there will be hundreds of trillion RMB of foreign capital inflows, which will form a strong support for the development of China's bond market, and also provide an "oasis" for the international financial market, one that can be a haven for the upcoming storm.
Final analysis conclusion:
When international capital seeks to invest in an "oasis", the Chinese bond market should seize the opportunity to promote the development of the Chinese bond market to be more standardized and legalized through reform and opening up, while increasing the supply of medium and long-term products; this will make it an "oasis" of global capital markets.
