Even as foreign institutions bought record volumes of mainland Chinese government bonds, Taiwan’s Fubon Life slashed its exposure to China’s fixed income due to scepticism about the country’s economic growth.

“[In the fixed income investment space], allocations to North America have indeed risen in the fourth quarter, while those to Asia have gone down….we had a bit of doubt about the economic growth in China last year, so we reduced our exposure to some Greater China bonds,” a senior executive at Fubon Life said in a teleconference to announce its 2019 results on Monday (March 30). China’s 2019 GDP growth rate was 6.1%, the slowest in three decades.

“To maintain the overall allocation so there won’t be a large difference [in the fixed income exposure], we have reallocated [the reduced positions in Greater China] to North America bonds. They are all investment-grade,” she said, without providing specific numbers.

Fubon Life did not indicate whether it would continue to reduce its investment in Greater China bonds. China is the world’s third-biggest bond market. 

As of the end of 2019, foreign bonds accounted for NT$2.14 trillion, or 53% of Fubon Life’s NT$4.04 trillion investment assets. Of that amount, 53.2% is allocated to North American bonds, up 1.7 percentage points compared with end-2018. In comparison, Asia and other regions accounted for 23.5%, down 2.2 percentage points compared with the same time last year.

The Taiwanese insurer’s move came at a time when foreign ownership of yuan-denominated Chinese government bonds reached a record Rmb1.34 trillion ($188.71 billion) as at the end of February, according to Reuters’ calculation of China Central Depository and Clearing (CCDC) data. It was up 2.3% from January, the biggest monthly increase over 12 straight months of gains, Reuters reported on March 4.

A close examination of Fubon Life’s bond investment portfolio might explain its relatively small holdings of China’s sovereign bonds. The insurer only had a 5.7% allocation to government bonds among its total foreign fixed-income investments as of end-2019. The bulk of its overseas bond exposures were made up of corporate bonds and financial bonds, which accounted for 49.7% and 42.2% of its bond portfolio, respectively, as it seeks higher yield.

In contrast, foreign investors are flocking to China’s soverign bonds as the country becomes included in more global bond indices.

Bloomberg included China bonds in its Bloomberg-Barclays Global Aggregate Index (BBGA) in April last year, meaning some of China’s onshore government and policy bank bonds will be included in the index over a 20-month phased-in process. The recent inclusion of China in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) on February 28, which is now disrupted due to market rout, is also only limited to China sovereign bonds. 

DOMESTIC SHIFT

Fubon Life’s investment assets had grown 11.7% year-on-year in value to NT$4.04 trillion as of end-2019. Its investment income climbed 14.5% to NT$145.4 billion during the period, thanks to strong capital gains from its bond investments.

Investment yields before and after hedging were 4.72% and 3.83% respectively at December 2019, showing improvements from 4.63% and 3.62% registered in the previous year.

Its domestic exposure amounted to 39% of its investment portfolio, up from 35.5% from the previous year. In contrast, its overseas investments made up of 61% of its investment portfolio, showing a fall from 64.5% in the previous year.

Taiwan insurers can invest no more than 65.25% of their assets overseas, and local regulators have been urging lifers to shift more of their investments onshore. 

Source: Fubon Life (click for full view)