Gregory Suen, HSBC Global Asset Management
“There are about $2.5trn of assets that track the BBGA (Bloomberg Barclays Global Aggregate Index), and by the end of the 20-month phasing-in period onshore Chinese bonds will comprise 6.1% of this benchmark index,” HSBC’s fixed income investment director Gregory Suen told FSA in an interview.
In January, Bloomberg said that it would include Chinese bonds from 1 April in its widely-tracked BBGA index after the Chinese authorities introduced enhancements to the market structure, such as the implementation of delivery versus payment settlement, the ability to allocate block trades across portfolios and clarification on tax collection policies.
Meanwhile “other leading index providers, including JP Morgan and FTSE, are assessing the merits of the recent structural changes and are expected to make a decision about inclusion in their indices soon,” said Suen.
In any case, foreign flows into the $11trn China bond market (the third biggest in the world after the US and Japan) are likely to be higher than the figure implied by the 6.1% BBGA weighting, which will be reached in November 2020.
In addition to passive funds, “more active investors will appreciate the diversification benefits of the market, as well as the high yields — about 3% on 10-year bonds — and low, medium-term volatility compared with other government bond markets,” said Suen, who manages the HSBC All China Bond Fund and the HSBC RMB Bond Fund, as well as several institutional portfolios.
Foreign investors make up only 2% of the market, which is substantially less than international ownership of other sovereign bond markets. For instance, about 30% of the US market and 65% of the German market is held by foreigners.
Suen points out that there is a slight negative correlation between US and China government bonds, because of differences between US and Chinese interest rate cycles. China bonds have also earned better cumulative returns over the short-, medium- and long-term — largely due to their higher yield.
Moreover, the macroeconomic outlook is encouraging, while the currency should remain stable, argued Suen.
“Economic growth is slowing, inflation is subdued and a relatively loose central bank monetary policy is providing plenty of liquidity after a period of forced corporate deleveraging,” he said.
HSBC is by no means the only fund manager to feel positive about China bond inclusion.
Separately, Hayden Briscoe, head of Asia-Pacific fixed income at UBS Asset Management sent out a note to media describing Bloomberg’s inclusion as “a major change for global capital markets and will soon propel the onshore market past Japan as the second largest in the world”.
Three-year cumulative performance of HSBC renminbi bond funds vs the sector
Source: FE Analytics. In US dollars.