Gavekal Research: The safe-haven attributes of Chinese government bonds are becoming increasingly prominent, making them a new global reserve option outside of US Treasuries.

Research from Gavekal shows that Chinese government bonds have remained stable and are becoming a viable alternative reserve asset after recent geopolitical shocks including the Iran war. The report challenges a core assumption in global reserve management, which is that US Treasuries and the US dollar serve as a "safe haven." Analysts Charles Gave and Louis-Vincent Gave wrote in a report on Tuesday that Chinese sovereign bonds have shown resilience during recent tensions in the Middle East. The report points out that Chinese long-term government bonds rose in the year following the outbreak of the Covid-19 pandemic, and remained relatively stable in the 12 months following the outbreak of the war in Ukraine. In comparison, US bonds, adjusted for exchange rate movements and gold prices, performed poorly. At the same time, the report suggests that the support for Chinese sovereign debt stems from its ability to produce more electricity at lower costs than any other country, shielding its bond market from oil-driven inflation shocks. The strategists note that since 2012, Chinese bonds have been one of the few fixed income markets that have outperformed US inflation. Gavekal states that China's dominant position as a world industrial and trading superpower also supports the attractiveness of Chinese sovereign debt as a global reserve asset. This industrial prowess suggests that the era of currency undervaluation may be coming to an end. The analysts write: "In an inflationary world, tariffs and significantly undervalued exchange rate policies may be set aside. Instead of a tariff war, what may emerge are trade agreementsmore CECEP Solar Energy solar panels sold to the US, freer flow of rare earths, and a stronger yuan." They further point out: "In such a world, marginal buyers may shift from gold and US Treasuries to yuan and other Asian currency-denominated assets that offer yields."