RMB bonds may offer an unexpected shelter in a prolonged oil shock, as global fixed income markets struggle to absorb a renewed inflation impulse, according to Allianz Global Investors’ Jenny Zeng.
Speaking to Investment Officer, the Hong Kong-based global CIO fixed income said the case for Chinese government bonds is not driven by yield, but by their ability to preserve capital if energy disruption feeds through into both inflation and growth.
“In a scenario like that, I would have a look at RMB bonds,” she said.
Different cycle
Zeng argues that markets are still underestimating the duration of the conflict and its broader macro-economic impact. So far, investors have focused on inflation and front-end rate repricing. The next phase, she said, will be about growth.
Against that backdrop, traditional developed market bonds may offer less protection. “It’s more that RMB bonds may be one of the few government bond markets that can hold their value in that kind of environment,” she said.
The rationale lies in China’s different position in the global cycle. While the US and parts of Europe remain in late-cycle conditions, China is operating with lower inflation and greater policy flexibility.
“China has an inflation buffer because inflation is so low. That gives it a very different starting point,” Zeng said.
Not about yield
Zeng was explicit that this is not a conventional carry trade, earning income from interest while holding an asset. Instead, the appeal is diversification at a time when correlations between traditional assets may become less reliable.
“I think RMB bonds are a good diversifier, particularly from a volatility protection perspective,” she said.
She also expects currency and equity dynamics to play a role as global trade adjusts. “We could see exporters repatriate more earnings and convert dollars into RMB, which would support the market,” she said.
Portfolio implications
For investors with heavy exposure to US dollar assets, the argument is ultimately about resilience rather than return maximisation. “If you’re a dollar or euro-based investor, RMB bonds could work from a total return perspective in that scenario,” Zeng said.
That positioning sits alongside a more nuanced view on the dollar. Allianz Global Investors continues to expect structural dollar weakness, but near-term dynamics are dominated by energy markets. “Short term, the momentum is still on the dollar side, particularly if oil stays higher for longer,” she said. “But valuation works against the dollar, because it remains quite expensive.”
The recent strength of the dollar reflects the US position as a net energy exporter.
Europe exposed
The contrast is Europe, which remains more sensitive to rising energy costs. That vulnerability is already reflected in market pricing. Investors expect stronger inflation pressure in Europe than in the US as higher energy costs feed through the economy.
“European economies are expected to face much larger inflationary pressures than the US,” said Valentine Ainouz, head of global fixed income at Amundi.
Complacent markets
For Zeng, however, the more important issue is what markets are not yet pricing. So far, the adjustment has been concentrated in inflation expectations and the front end of the yield curve. Growth risks remain largely absent from pricing.
That view is echoed more broadly, with investors still treating the conflict as a temporary inflation shock with limited impact on growth. Zeng expects that to change as economic data weakens.
“If the market starts to see weaker PMI prints or weaker employment data, that’s when the focus might shift from inflation to growth,” she said.
“I think the market remains quite complacent,” she added. “When investors realise the war is not ending quickly, that’s when you move from de-grossing to real selling.”