Sunday, October 24, 2021

Japan’s GPIF will stay away from Chinese government bonds even after benchmarking

TOKYO/SHANGHAI-Japan’s Government Pension Investment Fund (GPIF) will not invest in Chinese government bonds due to settlement and liquidity issues, even though they will be included in a major bond index next month, it said on Wednesday.

The world’s largest pension fund, with net assets of 193 trillion yen ($1.729 trillion), said it would stay out of yuan bonds after Chinese bonds are included in the FTSE Russell’s World Government Bond Index (WGBI) from October.

GPIF President Masataka Miyazono, in minutes of his board meeting in July, cited three reasons why the fund thought investing in Chinese bonds would be risky for a large investor like GPIF. The minutes were released on Wednesday.

“Chinese government bonds cannot be settled in an international settlement system that can be used for other major government bonds. Market liquidity is still limited compared to the size of the GPIF’s investment scale. Futures trading is not allowed,” he said.

In recent years, Chinese government bonds have been increasingly accepted by international investors as the market has grown in size and they offer a good yield compared to developed markets.

Chinese 10-year bonds offer a yield of more than 2.8 percent. US 10-year bonds yield just over 1.5 percent while Japanese bonds yield around 0 percent. In Europe, the yield on German bonds is negative.

With FTSE Russell’s latest move, all major bond index providers now include China as the country gradually opens up its bond market to foreign investors.

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Some market participants are skeptical about whether the GPIF’s decision is purely financial, given the rocky diplomatic relations between the two countries.

Despite strong economic ties, the world’s second and third largest economies have clashed over a variety of issues ranging from Taiwan to territorial disputes and wartime history.

A director of a Chinese brokerage in Shanghai, who declined to be identified as not authorized to speak to the media, says the rationale behind GPIF’s decision is weak.

“We have revised our settlement speed for them. T+3 is just for those slow moving Japanese financial institutions. So they are lying with their teeth,” he said.

Reuters reported in January that Japanese investors, including GPIF, were wary of including Chinese bonds in their portfolios.

GPIF, which uses the WGBI as its benchmark for a large portion of its foreign bond investments, will exclude Chinese government bonds from its benchmark.

Its decision comes as Chinese property developer Evergrande’s debt crisis has raised concerns about the health of some leveraged Chinese companies.

International investors are also concerned about the flurry of regulatory action by Beijing on a variety of industries from fintech to education.

($1 = 111.65 yen)

by Hideyuki Sano and Andrew Galbraith

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This News Originally From – The Epoch Times

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