Higher yields, the internationalisation of the Renminbi (RMB), improved liquidity, and China’s recovery are contributing to global asset owners’ growing appetite for Chinese sovereign bonds in their fixed income portfolio, despite regulatory risks.
With developed markets sovereign bond yields hovering around 1%, and at times falling into negative territory, Chinese government bonds are looking more attractive, trending from 2.1% to as high as 3.4%.
A chief investment officer of an Asian public pension fund told AsianInvestor that he thinks the RMB will appreciate gradually as the currency becomes more international.
“As a long-term investor, holding RMB [assets] for a long time is quite attractive,” he said. “I do believe that Chinese government bond looks really attractive in terms of both yield generation and the currency appreciation in the long run.”
With the recent establishment of Germany’s Allianz Insurance Asset Management in China – the country's first wholly foreign-owned insurance asset management firm – experts believe that other foreign insurers will keep the ball rolling with China-based expansions on both the insurance business and asset management sides.
On July 30, Allianz Group's Allianz Insurance Asset Management received approval from the China Banking and Insurance Regulatory Commission (CBIRC) to establish itself as China's first wholly foreign-owned insurance asset management firm, with a registered capital of RMB100 million ($15.4 million) and headquarters in Beijing.
Hong Kong and mainland Chinese authorities are hammering out details for the introduction of an “insurance connect” scheme as the next major step in the financial integration of the Greater Bay Area, according to South China Morning Post last July, though details have yet to be announced.
“The Greater Bay Area presents immense opportunities for AXA in the long term, thanks to its large population, economic dynamism and growing demand for quality insurance solutions,” Gordon Watson, CEO for AXA Asia and Africa, told AsianInvestor.
Investors have traditionally been chasing big Chinese names in prominent sectors for better returns, but these days, this is precisely where the risks lie.
From tech firms Ant Group and Didi to educational players, Chinese authorities are extending their regulatory mandates to major industries across the spectrum. Investors believe that this trend is not going to fade anytime soon, and sectors such as healthcare, property, and online entertainment might see further scrutiny this year.
“Investing in China is of course essential, given the scale of the market. But western investors are hesitating over political tensions between China and the US, and also the differences in market maturity,” an investment executive at a US pension funds who declined to be named told AsianInvestor.
The internationalisation of the Chinese yuan (CNY or RMB) has opened up opportunities for asset classes such as Chinese bonds, but experts told AsianInvestor that there are still some challenges to overcome before the currency can rival the US dollar (USD).
For the first half of this year, RMB appreciated by more than 1.2% against the US dollar, amid US dollar weakness against major currencies.
The Chinese government has also been developing a digital yuan, which is currently undergoing trials in several cities. Once launched, the digital currency is expected to hasten the process of RMB internationalisation.
However, experts told AsianInvestor that further capital liberalisation is needed in China to allow more convertibility of the CNY and improve flow in and out of the country.
Experts warn that Beijing must take even speedier action to help its rapidly aging population save enough for retirement. In particular, the country’s regulators need to diversify the range of assets available for local pension funds into more alternative assets, to help them ensure more consistently high annual investment returns.
Pension experts say the government and regulators do not lack for areas they need to improve. The nation is expected to see a RMB8 trillion to RMB10 trillion ($1.13 trillion to 1.4 trillion) pension gap emerge over the next five to 10 years and it will widen even further over time, the China Insurance Industry Association stated in January.
“An effective pension system is supported by several pillars. China’s system has desirable features but there are also areas for enhancements, in order to improve the efficacy and sustainability,” Janet Li, Mercer’s Asia wealth business leader, told AsianInvestor.