(Bloomberg) -- Bond investors looking for yield and an effective hedge against a broad downturn in equities are increasingly turning to China.

The appeal of that nation’s sovereign debt is on display this year as policy makers across major economies deploy ultra-aggressive stimulus, crushing yields and weakening currencies. With U.S. Treasuries leading the plunge in yields, foreign holdings of China’s debt have surged to a record 1.79 trillion yuan ($274 billion), according to data published by ChinaBond.

China’s relatively restrained easing, its inclusion in global bond indexes, and yield differential have Citigroup Inc. forecasting that its debt market could see $100 billion of inflows annually over the next three years. With Wall Street worried about the 60/40 portfolio as the relationship between Treasuries and stocks breaks down, Chinese bonds are in a sweet spot offering positive yields and a hedge against risk.

The People’s Bank of China is unlikely to follow developed-markets peers to full-blown monetary easing and foreign demand should be “persistent” given the elevated rate differentials, according to Xiangrong Yu, an economist at Citigroup in Hong Kong.

There is support from the central bank, not to actively suppress yields like elsewhere, but to limit any sell offs and provide stability. The PBOC showed it’s prepared to support bonds in times of stress last month when corporate defaults unsettled markets resulting in yields rising higher.

Chinese government debt demonstrated its utility as a safe haven this year, with its benchmark 10-year yield dropping more than 60 basis points from January to April amid the broader market chaos. While sovereign debt in the U.S., Europe and Japan also rallied, few of them now offer much yield.

Sweet Spot

The differential between a 10-year Treasury and a Chinese benchmark is now over 230 basis points, compared with about 125 basis points at the start of the year.

Other large Asian economies like Indonesia and India do offer higher returns, but they remain vulnerable at times of stress, with major ratings agencies assessing China’s debt as four-to-five levels more sound. And whereas China has seen global funds flood in, they’ve dumped almost $15 billion of Indian debt this year.

Perhaps the most telling indicator is the behavior this year of the conservative and yet yield-hungry Japanese investors. In the first nine months, they’ve sold Indian and South American debt, cut back on Southeast Asia, and plowed 420 billion yen ($4 billion) into Chinese bonds.

There are still concerns over the Chinese bond market, with international funds keeping a wary eye on liquidity, transparency and any capital controls that curb their ability to quickly repatriate money.

Still, foreigners make up just a fraction of bond ownership, putting them on the right side of the flow as passive demand rises. Long-term support is likely after FTSE Russell in September followed JPMorgan Chase & Co. and Bloomberg Barclays to include them in its flagship indexes.

The appeal of China’s debt will be on display again this week, with the consumer price index forecast to show no inflation in November, compared with the 3.07% yield offered on three-year notes.

Read more: Strong Yuan Fuels Foreign Flows Into Bonds

Below are the key Asian economic data and events due this week:

  • Monday, Dec. 7: China trade balance, Taiwan trade
  • Tuesday, Dec. 8: Japan 3Q final GDP and current account balance, Taiwan CPI
  • Wednesday, Dec. 9: China CPI and PPI, Japan core machine orders, Australia Westpac consumer confidence
  • Thursday, Dec. 10: Japan PPI, Philippines trade
  • Friday, Dec. 11: New Zealand BusinessNZ manufacturing PMI, Thailand foreign reserves, India industrial output

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