Macroscope | Why investors should beware China safe haven narrative amid Iran crisis

Are Chinese government bonds a refuge from global economic turmoil? That the financial markets of a country which has struggled to fully shed the “uninvestable” label are being touted by a growing number of investors and analysts as a safe harbour attests to the dramatic shift in perceptions of China since the beginning of last year.

Although the “uninvestable” tag applied to Chinese equities, which suffered a prolonged spell of extreme bearishness from 2021 to 2023, the government bond market has experienced years of foreign outflows partly in response to yuan weakness and more attractive yields in other markets.

However, a research report by Gavekal on March 24 drew attention to the resilience of Chinese sovereign debt in the face of a succession of global shocks. “Long-dated Chinese government bonds rose in the first year post-Covid and were flat in the first year post-Ukraine war, when the ‘China is uninvestable’ chorus was at its loudest,” Gavekal said. “[Chinese government bonds] have held their own in recent weeks.”

China’s industrial might, huge trade surplus and ability to generate electricity at scale and cheaply have made Chinese bonds “the reserve asset of choice”, outperforming US Treasuries and gold, Gavekal said.

The energy crisis triggered by the war in Iran has accentuated sources of resilience in China. In a region that is acutely vulnerable to energy supply disruptions because of its heavy reliance on imports of oil and gas from the Middle East, China is best placed to withstand the shock.

Despite being the world’s largest importer of oil and gas, China is relatively insulated from the effective closure of the Strait of Hormuz. Oil accounts for just 18 per cent of the country’s total energy consumption, significantly below the global average of 30 per cent. According to Nomura, oil and gas supplies passing through the strait constituted just 6.6 per cent and 0.6 per cent respectively of China’s overall energy use before the war.