Chinese disinflation wave is set to boost emerging-market bonds

[ZURICH/SINGAPORE] A wave of Chinese exports redirected towards emerging markets is likely to help crimp inflation across the developing world and bolster longer-maturity bonds, fund managers say.

Goods from the Asian nation are set to flow away from the US due to the higher tariffs imposed by US President Donald Trump, and be a force for disinflation elsewhere, according to Principal Asset Management, Banque Lombard Odier et Cie, and Barclays. Bonds in countries with a high ratio of Chinese imports will benefit the most, including Malaysia, Brazil and South Africa, Barclays says.

“There’s a potential for disinflationary forces to be pushed out” to other countries due to the spare capacity in China, said Howe Chung Wan, head of Asian fixed income at Principal Asset in Singapore. “We like duration” and favour sovereign bonds in local markets that are currency hedged, he said.

Emerging-market local-currency bonds have rallied in the past month, with a Bloomberg index of the securities rising about 2 per cent, as Trump’s tariff threats have weakened the US dollar and pushed down the price of oil. Downward pressure on inflation, coupled with appreciating currencies, are seen as giving central banks more room to cut interest rates, adding to the allure of longer-maturity debt.

China’s exports to the US slid 21 per cent in April from a year earlier after the imposition of higher tariffs earlier in the month, according to government data published last week. At the same time, firms the nation were able to increase sales to other markets to compensate, with total exports jumping 8.1 per cent during the period, far more than economists forecast.

China and the US reached a trade truce this week, under which the combined 145 per cent US levies on most Chinese imports will be reduced to 30 per cent, while the Asian nation’s 125 per cent duties on US goods will drop to 10 per cent. Still, the agreement will expire after just 90 days if no further deal is reached.

Cheap imports

One of the main reasons to be positive on longer dated emerging-market bonds is the fact that China-driven disinflation will allow policymakers to lower interest rates, according to Guan Yi Low, a fixed-income portfolio manager at M&G in Singapore.

“Near term, we could be facing even more disinflation from the cheap Chinese imports,” she said. “This frees up the ability of a lot of the Asian central banks to bring forward the policy cuts.” The weakness of the US dollar also means that policymakers will no longer have to worry about possible currency weakness if they lower interest rates, she said.

The increase in cheap Chinese imports is not always viewed positively. The Bank of Thailand and Thai companies have warned about the impact of Chinese imports “flooding” South-east Asia’s markets and undercutting other producers.

Some are still wary about buying emerging-market local-currency bonds, saying the relatively high US interest rates will limit flows into the securities.

Lombard Odier’s clients still prefer US dollar-denominated debt, said John Woods, chief investment officer for Asia in Hong Kong “I’m not yet ready to call a substantial weakness in the US dollar,” he said. “The interest-rate differential is still quite wide.”

Others are more bullish. MFS Investment Management said it holds an overweight position on Asian debt due to its positive view on duration, or the sensitivity of a bond to changes in interest rates.

“Duration is mainly what we think is the most attractively valued right now because central banks will use the opportunity of US dollar weakness to cut more,” said Ward Brown, a portfolio manager at the Boston-based money manager. “We have not had overweights in Asian duration for some time, but we have some now.” BLOOMBERG