Financial research firm Gavekal: China's government bonds perform steadily, highlighting their safe-haven value

The reporter at 每经｜Zhang Shoulin
The editor at 每经｜Yang Yi

Recently, the financial research institution Gavekal released a research report, which provides a detailed analysis of the current state of international reserve assets.

The report notes that since 2012, investing in Chinese government bonds has been one of the few ways to help global government bond portfolios achieve returns that outperform U.S. inflation. In recent years, Chinese government bonds have performed steadily, and are gradually becoming a viable alternative reserve asset, potentially weakening the position of gold and U.S. government bonds.

The research report also states that, based on a comprehensive analysis, Chinese government bonds can be viewed as a potential reserve asset.

Selling pressure on gold may continue

《每日经济新闻》 learned that the research report published by Gavekal mentioned above was written by Charles Gave and Louis-Vincent Gave. In the report, the two authors point out that for many years, the market has defaulted to U.S. Treasury bonds as the preferred reserve asset, and that what central banks around the world primarily hold is U.S. government bonds.

The report says that entering the second decade of this century, the return on gold has far outpaced others, and the return on Chinese government bonds is also the case. “Gold is clearly the ultimate ‘neutral’ asset; in other words, gold is not anyone’s liability.”

The report further notes that since the beginning of 2002, investors should have held gold rather than U.S. government bonds, and this judgment still holds today.

However, recently the price of gold has seen significant volatility, and the market has raised such questions—why did the price of gold fall sharply in the short term?

The simplest explanation is that gold was previously severely overbought, and overbought assets often get hit. Public data shows that over the past four years, central banks around the world combined have purchased between one-quarter and one-third of the world’s annual gold mine output.

The research report further analyzes that another possible explanation is that the newly seated Federal Reserve will be more hawkish than the market expects, and the collapse of rate-cut expectations is undoubtedly one factor behind the recent pressure weighing on gold over the past few weeks. Once the market stabilizes, gold can resume its upward trend. However, the recent selling pressure on gold may persist until overall market volatility eases.

In the above research report, the two authors also propose a new perspective: within the framework of the “Aleleparadox” and the “Wicksell interest rate theory,” the market assumes a binary choice between gold and U.S. government bonds, but people today are no longer living in such a binary world. For many countries, many central banks, and less dogmatic investors, Chinese government bonds are now a viable alternative choice.

Chinese government bonds’ hedging attributes stand out

The above research report shows that after experiencing geopolitical shocks, Chinese government bonds have performed steadily and are becoming a truly feasible alternative reserve asset.

“Since China began opening its bond market to foreign investors, we have stated multiple times the reasons for investing in Chinese government bonds.” In the research report, the two authors point out that the data itself speaks for the matter. Since 2012, investing in Chinese government bonds has been one of the few ways to make global government bond portfolios achieve returns that run ahead of U.S. inflation. During this period, investors who invested in other major bond markets suffered significant losses. For example, investing in the bond markets of Japan, Germany, and the United Kingdom even resulted in nominal negative returns. Among major peers, only Chinese government bonds outperformed U.S. inflation.

So what “macroeconomic” reasons can explain why Chinese government bonds can be seen as a potential reserve asset?

In response, the research report gives the following reasons: first, China firmly remains a global industrial superpower, laying a strong industrial foundation for renminbi assets; second, China’s advantages in global trade continue to stand out—now, aside from a few regions, China is the main trading partner for most parts of the world; third, China is now a world power electricity giant, forming a long-term comparative advantage in the power sector. The electricity produced by China is more than that of any other country, and at a lower cost. Given that the future “fuel” is electricity, China can generate, transmit, and store electricity at costs far below those of other countries, which is clearly a comparative advantage.

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