The Luxembourg-domiciled fund invests primarily in renminbi-denominated onshore bonds issued by government, policy banks and quasi-sovereign entities, but it can also invest in investment grade corporate bonds.
The fund is managed by the firm’s Asian fixed income team, part of its emerging market debt team, according to ASI’s Hong Kong-based spokeswoman. At this time the fund is available to professional investors in Asia only.
The firm noted in a statement that China’s onshore bond market has low correlation with other markets in a rising interest rate environment. Renminbi-denominated bonds have been also delivering positive returns despite the recent volatility in the emerging markets.
“The Chinese economy is the world’s second largest behind the US. However, it is still developing, with a very different growth path to that of mature G10 countries,” said Adam McCabe, the firm’s head of Asian fixed income, adding that the yields and diversification that the asset class brings are attractive to European investors.
Foreign participation in the onshore bond market is still small. At the end of the third quarter of 2017, foreign investors accounted for about 2% of China’s RMB 60trn ($9.10trn) bond market, according to data from the China Central Depository and Clearing Company.
However, ASI sees more opportunities in onshore bonds as Chinese authorities open up the market to international investors. The firm expects that the impact of the inclusion of Chinese bonds into global indices would be similar to that seen in the equity market.
Global bond index
In March, Bloomberg revealed plans to add China’s RMB-denominated government and policy bank bonds to the widely-tracked Bloomberg Barclays Global Aggregate Index. They will be phased in over a 20 month period beginning in the second quarter of 2019.
In the Bloomberg Barclays index family, the index components must be classified as investment grade and their currency must be freely tradeable, convertible, hedgeable, and free of capital controls. The index provider also said that additional enhancements are required before Chinese bonds are included. They include the ability to allocate block trades across portfolios and the clarification of tax collection policies.
Wilfred Wee, China fixed income portfolio manager at Investec Asset Management, said previously that the prerequisites required by the index provider are rather easy and reasonable.
“The index provider is asking for clearing of operational hurdles based on international trading standards. It is a matter of will for the Chinese regulators rather than ability,” Wee added.
Wee expects that once the market meets the required conditions for the Bloomberg Barclays index, China will be also included in other major indices provided by FTSE and JP Morgan.
Following the onshore bond index inclusion, BNP Paribas Asset Management has plans to hire locally-based experts to cover the asset class. It plans to add at least two more mainland-based analysts looking at the Chinese onshore bond market.
