At BEA Union Investment in Hong Kong, Pheona Tsang starts to be creative. The fixed income manager plans to fill this year 10% of a portfolio denominated in yuan with bonds denominated in US dollars, sold by Chinese companies outside the continental market.

She is not alone. Many fund managers are seduced by the same bonds, whose returns are rising steadily thanks to years of rate hikes by the Federal Reserve.

In December, dollar bonds averaged 6.7%, 2.8 percentage points higher than their onshore counterparts, after falling behind their onshore counterparts just 12 months ago, Natixis data shows. .

Last month, China Evergrande Group, one of the country's most indebted real estate developers, sold for $ 3 billion of dollar-denominated bonds during the largest offshore bond sale to high yield in Asia since the beginning of the year, with yields above 10%.

The recovery was also fueled by China's move to easier monetary policy to cushion the slowdown in its economy. This helped to lower interest rates and reduce 10-year government bond yields by 60 basis points from September highs.

"The onshore rates have been so compressed that valuation is a bit expensive," said Jason Pang, portfolio manager at JP Morgan Asset Management.

"Last year, rates continued to fall at the coast and you were able to generate capital gains," said Wonnie Chu, managing director of Gaoteng Global Asset Management, a Tencent-backed company.

Chu, however, believes that Chinese rate-down opportunities are limited, noting that 10-year government bonds have traded at around 2.6% over the last two 2006 easing cycles. and 2009. They are now around 3.1%.

So, Chu is turning to the dollar market "more interesting" this year.

RISK AND REWARD

The offshore dollar market presents significant risks.

Struck by the growing number of corporate bond failures, the slowdown in Chinese growth, and the tightening of the Fed, some Chinese borrowers "were really down" at the end of last year, said Tsang. .

The signs of tension are particularly apparent in real estate companies. Country Garden, a leader in the sector, this week announced a 52.2% drop in contract sales in January.

This year, real estate developers alone could refinance up to $ 72.6 billion, taking into account both their onshore and offshore needs, according to S & P's estimates.

In the offshore market, Chinese issuers will have a total of $ 77.5 billion in bonds maturing in 2019, up from $ 50.1 billion in 2018, according to Refinitiv data.

Tsang, however, remains optimistic, citing the Fed's recent move to a more cautious stance on future rate hikes.

"Even if we have one or two hikes (in 2019), we will be close to the end of the hike cycle."

The attractive returns offered by high yield real estate bonds, in particular, "more than compensate for the risks," said a Singapore-based fixed income firm.

While property sales and investment in China slowed as the economy slowed, house prices generally held up. Some investors are also betting that officials will ease restrictions on buyers if the economy continues to slow down.

Beijing already seems to be loosening up a bit, said UBS analysts in a report released this month.

Examples of this change include the "reopening of the onshore bond market to developers, the lack of mention of tightening during the recent Politburo meeting … and the moderate reduction in mortgage rates." ", they said.

Presence on land

Despite their preference for extraterritorial dollar returns, the four fund managers surveyed said they were simultaneously expanding their onshore portfolios.

They expect the Bloomberg Barclays Global Aggregate Index to boost the onshore market by including government and Chinese bank bonds in April.

According to estimates by Harvest Global Investments, this decision could bring in $ 110 billion worth of index tracking investors in China over a 20-month period.

However, these passive inputs do not fully reflect the assessment of the investment climate by international investors.

The increase in onshore exposure of BlackRock, the world's largest asset manager, for example, explains by "a combination of the openness of the world. access (to the market) and the vision of investment, "said Neeraj Seth, head of Asian credit of the company.

Seth, which had positive onshore rates in 2018, has taken a neutral stance and is aligning its "long positioning" with China's high-yielding offshore real estate names.

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