Gregory Suen, HSBC Global Asset Management
Although China’s government has implemented curbs aiming to slow down the extensive credit creation and to mitigate risk in the country’s financial markets, Suen sees the policy easing in the future.
As a result, the renminbi is likely to rise, making Chinese bonds more attractive to foreign investors.
The authorities attention had been triggered by investors who arbitraged rates between short- and long-term debt, Suen told FSA. To stem the practice, the officials lifted interest rates and tightened the money supply in an attempt to get leverage under control.
However, such measures are not a good long-term solution to China’s heavy corporate debt problem, as they will cause treasury rates to climb higher, Suen said.
Instead, he said he expects the government will shift its scrutiny to asset management practices this year, in order to monitor credit creation.
Asset management products have been commonly used as collateral for debt financing. Officials have prohibited the practice in order to reduce the risk of shadow banking by “not letting the asset management industry turn into a credit creation business”.
Inflow of foreign investment?
“The outlook for a stronger renminbi is partially due to a weaker US dollar. But the renminbi has also seen the same trend versus a basket of global currencies or other Asian currencies,” Suen said.
The positive outlook is likely to attract foreign investors who will want to increase their exposure to renminbi-denominated bonds, according to Suen, who manages the HSBC RMB Bond Fund.
Currently, the participation of overseas investors in the onshore bond market is limited. “China’s bond market is the world’s third largest, but foreign investors take up around 2-3%,” Suen said. There is much room for growth, he added.
A growing interest from foreign investors should also come from the opening of investment channels, such as the Mainland-Hong Kong Bond Connect scheme, he added.
However, bond fund managers have remained cautious on using the new scheme. Gordon Ip, chief investment officer for fixed income at Value Partners, said earlier that his firm participated in the Bond Connect scheme only during the first week after its launch.
“We only bought paper with a maturity of at most 1.5 years. The issuers are all quality names. As of today, half of the commercial [issuance] has already reached maturity,” he said.
Foreign investors can also access onshore bonds through the China Interbank Bond Market, which opened last year to foreign investors, and through quota programmes, such as the Qualified Foreign Institutional Investor and the Renminbi Qualified Foreign Institutional Investor programmes.
Not everyone shares Suen’s optimism on the growing interest of foreign investors in China’s bonds.
Ivan Chung, associate managing director at Moody’s Investors Service, told FSA previously that currency volatility has been a concern for investors. Many overseas investors have been converting their onshore bond investments into US dollars or other currencies, in the fear that RMB-denominated bonds might lose value when the renminbi depreciates.
The HSBC RMB Bond Fund invests 33.6% of its assets in government bonds and 31.7% in bonds issued by banks, according to FE.
Performance of the HSBC RMB Bond Fund versus the category average
