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Investec bets on China government bonds

Amid concerns over illiquid credit market in China, bonds issued by the government and the policy banks are an attractive option, argues Wilfred Wee, China fixed income portfolio manager at Investec Asset Management.
Investec bets on China government bonds
Wilfred Wee, Investec Asset Management

“Our clients express their concern over the illiquidity in the onshore market. We completely agree,” Wee told reporters in Hong Kong earlier this month. “This is why the most attractive segment of the market remains the most liquid segment, which is represented by government bonds and the three policy banks. Altogether they account for almost half of the market.”

The three policy banks are: The Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim).

Moreover, apart from liquidity, the credit ratings of Chinese government and quasi-government bonds also justify their attractiveness, said Wee, who co-manages the Investec All China Bond Fund.

“A sizeable segment of the onshore bond market is not rated by the international rating agencies, such S&P, Moody’s and Fitch Ratings,” he noted. Government bonds and those issued by the three policy banks have international agency ratings.

Wee said his fund is positioned rather conservatively at this stage. The portfolio is predominantly made up of investment grade bonds, with around 70% investing in bonds rated A or above.

“Around 66% of bonds rated by international agencies are in the A-rated territory. A material portion of those bonds are issued by government, policy bank and state-owned enterprise,” Wee said.

The duration of the fund, at 3.3 years, is also relatively short compared to its historical average, in order to minimise its sensitivity to the interest rate fluctuations.

“The fund has an increased allocation to onshore Chinese government bond, partly because of comparative valuation. The US dollar credit is getting a little bit expensive while the spread and yield are on the low side. We took this position towards the end of last year,” Wee added.

China access

Since the official launch of the cross-border bond trading programme, fund managers have not engaged to the same extent as those participating in the connect scheme for equity trading.

Gordon Ip, chief investment officer for fixed income at Value Partners, said the firm only participated in the Bond Connect scheme during the first week of launch. “We only bought paper with a maturity of at most 1.5 years. The issuers are all quality names. As of November, half of the commercial [issuance] has already reached maturity,” he said.

Wee does not see the Bond Connect would add much value to the fund he manages, for which he used China Interbank Bond Market Direct to gain access to the onshore market.

“The Bond Connect does not add much value to the fund managers that have already settled in with CIBM direct. The same bonds are traded on both platforms but they are not fungible, meaning that no cross-platform trading is allowed.”

However, the firm is looking to use the Bond Connect in other ways, such as investing for their standalone segregated institutional clients.

Index inclusion

China’s onshore bonds will be gradually added to the Bloomberg Barclays Global Aggregate Index beginning in the second quarter of 2019. Prior to the official inclusion, several conditions concerning trading settlement and taxation will have to sorted out by the country’s regulators.

Wee said 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.”

He 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.

“China does not really need foreign money. It has a big saving pool with strong balance sheet. What they want is to become an international player, operate against international competition and have market efficiency.”

The Investec All China Bond Fund versus category average

Source: FE. Fund NAV is converted to US dollars for comparison purposes.

Part of Mark Allen.