Japanese state pension fund shuns renminbi-denominated sovereign bonds



The Japanese government’s Pension Investment Fund will avoid Chinese renminbi-denominated sovereign bonds from its $ 1.73 billion portfolio, citing liquidity problems and other risks in the world’s second-largest economy.

The move by GPIF, the world’s largest pension fund, was revealed in the minutes of its recent board meetings on Wednesday and taken amid growing concern over the unacceptably high risk for traditional investors of the Chinese markets.

Relations between Tokyo and Beijing are also frosty due to regional security concerns, growing protectionism towards the semiconductor industry, and wider geopolitical tensions.

The move appeared to have a political advantage, a person close to senior GPIF officials said, adding that liquidity could be a useful excuse, but the move likely reflected concerns of its management committee about a public reaction in Japan.

The manager of another large Japanese fund, which closely models its overall asset allocations on those of GPIF, said he continues to view Chinese government bonds as investable and will not follow the same strategy.

The minutes of the GPIF meeting held in July show that various committee members spoke out against transferring funds to Chinese renminbi-denominated sovereign bonds. Masataka Miyazono, President of GPIF, concluded that there were three main risks in doing so: the relatively limited liquidity of the market; Chinese bonds are excluded from the international settlement system used for other sovereign notes; and non-Chinese investors were banned from trading in futures.

When the GPIF committee met on September 22 – as global markets braced for a delay in interest payments by the heavily indebted Chinese real estate group Evergrande facing a potential default – its members voted against any investment in government bonds denominated in RMB.

The internal GPIF debate gained momentum with the announcement in March that FTSE Russell, the index provider, would gradually start incorporating Chinese debt into its global government bond index from October. GPIF has increasingly followed the benchmark in its efforts to secure returns outside of the ultra-low rates available in the Japanese domestic market.

FTSE Russell said this year that its decision to add China to the WGBI marked its “arrival as a global market”.

Robin Marshall, director of fixed income research at the company, wrote in a note that if private investors allocate funds to reflect China’s 5.25% weighting in the index, such as it was phased in over three years from October 2021, between $ 130 billion and $ 158 billion in capital could flow into the Chinese government bond market.

Chinese 10-year bonds, which yield 2.86 percent, have become increasingly attractive to some investors, as their US 10-year counterpart trades at a yield of 1.50 percent. But despite increasing pressure for better returns, the GPIF will compare to a version of the FTSE index that does not include Chinese debt.

The GPIF portfolio has undergone a radical transformation in recent years as the demands placed on it and the demographics of the world’s oldest company have become more acute. In 2008, GPIF allocated two-thirds of the portfolio to domestic bonds and about 10 percent each to foreign stocks and bonds. As of this year, allocation to foreign and domestic stocks and bonds was targeted at 25 percent each.



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