By Andrew Galbraith and Daniel Leussink
SHANGHAI/TOKYO (Reuters) - Not for the first time, China's markets are marching to their own beat.
Just as investors come to terms with a bleak outlook for global growth and earnings, with weak German industrial and trade data just the latest portents of gloom, China's economy may be bottoming out, helped by Beijing's early moves to prop up a stuttering economy.
At the same time, Chinese regulators' drive to open up financial markets to foreign involvement is making the country more accessible, and a potentially rich target for foreign investors looking to diversify.
"The more you see stabilisation of the Chinese growth story - and I think you'll see that coming through in the middle of the year - the more comfortable you'll be with looking at the debt and equity side of things in China," said Kerry Craig, Global Market Strategist at J.P. Morgan Asset Management in Melbourne.
To be fair, global markets are having a good year. Index provider MSCI's broadest gauge of global shares is up more than 13 percent since January, erasing last year's losses even against the backdrop of the U.S.-China trade war and Brexit.
But dovish shifts by the U.S. Federal Reserve and the European Central Bank have in recent weeks sparked market jitters, pushing down bond yields and jolting equity indexes.
China's markets have been comparatively unfazed. The blue-chip CSI300 index has risen more than a third so far this year, making it the world's best-performing major index.
Yields on benchmark 10-year Chinese government bonds have also jumped in recent days alongside rallying shares as investors' appetite for the safest investments has ebbed.
Faced with a slowing economy due in part to a multi-year campaign to reduce risky leverage and to headwinds from the trade war, Beijing began easing policy selectively last year, channelling more money into the real economy to boost growth.
Tax cuts, infrastructure spending and pledges to boost lending and lower borrowing costs have helped revive stagnant credit growth, brightening the outlook for corporate earnings.
"With easing policies starting to have an impact on credit creation, credit growth should continue to pick up this year," Chen Long, China economist at Gavekal Dragonomics in Beijing, said in a note.
"It's clear that China's economy slowed further in the first quarter of 2019, but there's an increasingly strong consensus that growth will bottom out and improve later in the year."
Chinese shares have also been bolstered by rising foreign interest.
Net flows into China's stock market through the Shanghai and Shenzhen Stock Connect programmes topped 125 billion yuan ($18.6 billion) in the first quarter of 2019, nearly triple the same period a year earlier, data from Hong Kong Exchanges and Clearing Ltd showed.
In February, the Institute for International Finance said foreign investors put more than $10 billion into Chinese onshore equities ahead of an announced rise in the weighting of A-shares in MSCI's benchmark indexes.
(Graphic: Different drummers, https://tmsnrt.rs/2WUNt2W)
Global index changes have extended beyond equities.
On April 1, index provider Bloomberg Barclays began a 20-month process of including some Chinese government and policy bank bonds in its Global Aggregate index, a move expected to draw billions of foreign dollars into China's $13 trillion bond market.
While initial flows tracking the index will be gradual, "at some point in time there will be an inflection point," said Dhiraj Bajaj, fixed income portfolio manager at Lombard Odier in Singapore.
For active investors, Chinese bonds provide advantages to a diversified portfolio, including lower average durations and significant yield premiums.
Frances Cheung, head of macro strategy for Asia at Westpac, said the yuan's relative stability could burnish the appeal of yuan-denominated assets to some investors.
"The RMB is less sensitive to risk sentiment than some of its regional peers including the IDR, KRW and MYR. The correlation between USD/CNY and Chinese government bonds is also low. These features render CNY bonds a good avenue for portfolio diversification, especially when initial exposure is low for many investors," she said.
Data from Bond Connect, which gives foreign investors access to China's interbank market, shows trading volumes through the scheme jumped 70 percent, and the number of registered Bond Connect investors rose 41 percent, in the first quarter of 2019.
Bond Connect says index inclusion has shifted the focus of trading toward government and policy bank bonds, which accounted for 66 percent of turnover in March, up from 37 percent in December.
But following a year-long rally that pushed yields on 10-year Chinese government bonds down nearly a full percentage point from highs in late January 2018, some investors may be seeing less room for profit, said Bajaj.
A lack of familiarity with Chinese bonds may also deter some foreign investors, while technical issues such as limited hedging tools and patchy trading of newly issued government bonds remain nagging concerns.
"I imagine a lot of investors in similar positions like myself have just kind of a lack of experience of the market that probably limits its global safe-haven flow," said Ross Hutchison, a global bond fund manager at Aberdeen Standard Investments in Edinburgh. "But that doesn't mean that won't change."
Craig at J.P. Morgan said foreign investors should approach Chinese bonds with care. "We do know that the Chinese government has a large amount of debt. We have to think about the quality of what's backing up those bonds," he said.
But if investors are comfortable with China's ability to contain debt, those concerns should ease, Craig added.
"We talk about the U.S. market being a safe haven, but U.S. debt is going to go up if they continue to spend at this rate," he said.
(Graphic: Benchmark moves, https://tmsnrt.rs/2WPCXtv)
(Reporting by Daniel Leussink and Andrew Galbraith; Additional reporting by Vidya Ranganathan in SINGAPORE; Editing by Lincoln Feast)