Chinese government-backed bonds to drive MPF returns in 2022

Experts believe it’s the right time to gradually increase MPF exposure to Chinese government and policy bank bonds, while interest rates in China are expected to stay low.
Chinese government-backed bonds to drive MPF returns in 2022

The Hong Kong government’s plan to relax restrictions for its $154-billion retirement scheme to invest in Chinese government and policy bank bonds can help drive performance and offer diversification benefits, experts of the city’s Mandatory Provident Fund (MPF) said.

If implementation goes well, the industry will also support the gradual opening up to other Chinese government issuers, such as state-owned enterprises and local governments, they told AsianInvestor.

Hong Kong’s Financial Services and the Treasury Bureau announced in late December that it will amend the current legislation governing MPF investments to include the central government and three policy bank bonds in the scope of “exempt authority”.

Christopher Hui

The three banks are the China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China.

The amended legislation will come into force by mid-2022 at the earliest, if it is passed in the Legislative Council. 

The initial plan was announced in the latest Policy Address in October of last year, and aimed to provide diversified and secure investment options and returns to the city’s pension savers.

Bonds not issued by the “exempt authority” must have a certain level of credit rating at the individual bond level to become the permitted investment subjects of MPF. "Since the individual bonds issued by the central government and policy banks may not all receive a credit rating, the above prevailing requirement has limited MPF investments in such bonds," said Christopher Hui Ching-yu, Secretary for Financial Services and the Treasury.

As of September 30, 2021, relevant investments only accounted for 0.27% (Rmb2.6 billion) of MPF’s total asset value, far less than its investments in bonds issued by commercial institutions on the mainland (Rmb23 billion, or 2.41% of MPF’s total asset value), Hui noted in the December 22 announcement.

Under the amended legislation, each MPF fund may invest up to 30% of its funds in Chinese government or policy bank bonds from one issuer. It may also choose to invest all of its funds in those bonds of at least six different issues.

Paula Chan, Manulife IM


“Due to their low correlation with other investments, Chinese government bonds and policy bank bonds have been able to provide diversification benefits to investors. Ultimately, Chinese bonds are attractive because they provide opportunities to enhance yield and to reduce overall portfolio risk,” said Paula Chan, senior portfolio manager for Asia fixed income at Manulife Investment Management.

The yield of the 10-year Chinese government bond (CGB) is currently around 120 basis points higher than the equivalent Hong Kong government bond, and 115 basis points higher than the equivalent US Treasury bond.

For policy banks, the yield spreads are higher. For instance, the China Development Bank Jan 27 bond is yielding around 2.9%.

“We agree that 2022 will continue to be a challenging environment for investors due to a number of market uncertainties,” Chan told AsianInvestor.

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“Given the generally weaker outlook for the Chinese economy in 2022, there is a strong case for China to pursue some moderate easing of both fiscal and monetary policies to support the economy. As interest rates in China are expected to remain low, this is a positive part of the interest rate cycle to invest in China bonds, as lower interest rates will help drive positive performance in the asset class.

“We believe the timing is appropriate to gradually increase exposure to China government and policy bank bonds,” she said.


Raymond Kwong, 
Willis Towers Watson

According to Morningstar data, the overall MPF return was 0.9% in 2021. “Under the continuing influence of the pandemic, we expect uncertainties in the market this year, so it is very important to continue to diversify investment,” Charlotte Chan, head of distribution, Hong Kong workplace and personal investing at Fidelity International, said in a note on Wednesday.

Noting that recent Chinese bond defaults were in the private and property sectors in particular, Raymond Kwong, director for investments Asia at Willis Towers Watson, said that CGBs and policy bank bonds have low default risks, and their inclusion in MPF bond and multi-asset funds should not increase the overall credit risk profile by much, although there will be a currency risk relative to the Hong Kong dollar.

“Although China has a slightly lower credit rating, it should have a higher diversified economic growth potential than Hong Kong,” Kwong said.

The Hong Kong government will keep an open mind on the future inclusion of bonds issued by other mainland government institutions. Kwong believes local government bonds make up a large number of outstanding bonds in China. But since they are not explicitly guaranteed by the Chinese government, it might take time for the Hong Kong government to consider such inclusions, he noted.

“This should be done gradually over time. But ultimately, expanding the investment universe to include state-owned enterprise (SOE) bonds and eventually privately owned enterprise (POE) bonds from other dynamic sectors and economic regions within mainland China would be appealing for MPF investors over the longer term,” said Manulife’s Chan.

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