The seemingly relentless decline in the CGB yield since the turn of the current decade has come to be viewed in some quarters as symptomatic of China's losing battle against the "Japanification" of its economy and bond market.
In recent years, the Chinese Government Bond (CGB) market has resembled that of Japan during that country's "lost decades". Notwithstanding differences in the nature and severity of the underlying structural issues, concerns have mounted that China may be experiencing its own "Japanification" scenario.
With yields tracking ever lower, US dollar-hedged CGBs have outperformed the bonds of major counterparts through market cycles over the past 20 years from both a total return and risk-adjusted perspective. While geopolitical risks exist, we think the benefits outweigh any well-regarded "grey swan" events when utilising CGBs as a diversifier within global bonds.
