Risk appetite puts China back on radar as bonds and equities gain

China is hot again. Following years of concerns about decelerating economic growth, a bloated and opaque banking system, and anxiety at the start of the year about a domestic credit crisis, foreign funds are flowing back into Chinese debt and equities.

The turnaround has been a few months in the making, starting in April and culminating in one of the most active Julys ever seen for mainland cross-border deal flows. The Hong Kong stock exchange has had its second-busiest July for initial public offering fundraising, according to Thomson Reuters. Chinese offshore debt volume in the past month has dwarfed anything seen in any previous July.

The Hang Seng Index rose 7.3 per cent last month, the biggest one-month gain in 2½ years. A shares climbed 8.6 per cent in July, the biggest monthly jump since December 2012. The H-share index is up 21 per cent since March 20, putting this index officially into bull market territory.

Those who buy, sell and analyse China securities attribute the recent buoyancy to two broad trends. The first has been a gradually improving global economy that has expanded investors' capacity for risk.

The second is that US treasury yields have stayed low and flat all year. This has gone against all expectations. At the start of 2014, investors believed treasury rates would rise as the US Federal Reserve phased out its bond-buying programme and an improved global economy stoked expectations for increased inflation.

The expectation was that rising treasury yields would make it unnecessary to hold higher risk emerging markets assets, as US government bonds and high-grade US corporate bonds benchmarked to treasuries would safely deliver the returns fund managers needed to hit their targets.

As treasury yields stayed low investors have had to scramble to find higher-returning securities in emerging markets - of which China dominates.