US fund house Invesco plans to invest in China’s newly opened interbank bond market (CIBM) this year with an initial focus on government and policy bonds, but it is likely to avoid corporate credit for at least 12 months.

The firm expects to be joining a flood of other capital, now that Beijing has removed the CIBM quota system for most investors and addressed other issues.

Invesco estimates in its latest China bond report, due for release today, that inflows could reach $200 billion to $400 billion from fund managers alone. It bases this calculation on the potential weighting of mainland onshore bonds in the indices and the estimated size of assets tracking those benchmarks.

Foreigners hold less than 3% of Chinese onshore bonds, a smaller proportion than in most emerging markets. A rise in that figure to 10% would represent an additional $400 billion in flows to mainland debt, according to Invesco.

Credit concerns

Invesco will initially avoid mainland corporate bonds due to their rising default rates and lower yields compared to offshore Chinese credits with similar maturities and credit profiles, said Ken Hu, Asia-Pacific chief investment officer for fixed income.

Many investors are put off buying renminbi bonds for reasons including that they feel the RMB may weaken and that China’s credit rating system needs bringing up to international standards.

Hu said Invesco expected the renminbi to remain quite stable against a basket of currencies of China’s trading partners and did not see it devaluing heavily against the dollar in the foreseeable future. Over the past couple of years, he noted, the renminbi has been strong relative to other major currencies such as euro, sterling, Australian dollar and Canadian dollar.

As the renminbi has a low correlation to other asset classes, RMB bonds offer diversification benefits, so Invesco tends not to hedge out the currency risk, Hu added.

Meanwhile, he was sanguine about the fact that Chinese rating agencies use different practices from their international, saying that they focused on different perspectives of Chinese bond issuers and issues. Invesco’s fixed income team respects both Chinese and international agencies, he said, being open-minded so as to understand the insights of both sides.        

Invesco’s CIBM plan tallies with the view of executives from BNP Paribas Securities Services, who believe asset owners such as pension funds are likely to invest in the CIBM within three to six months, and asset managers within six to 12 months, as reported.

Hu expects China’s debt market to be included in global bond indices within the next 12 months, in line with a recent forecast by rival US fund house Pimco. Global bond index providers now “have no excuse” to exclude China, he said.

Invesco started preparing for direct investment in Chinese onshore bonds two years ago, noted Hu, which is why he joined the firm in April 2014 from Bank of China Hong Kong Asset Management. Invesco currently invests in mainland bonds through its local joint venture, Invesco Great Wall Fund Management.

Asian bond appeal

Meanwhile, Hu said he saw global capital paying more attention to Asia generally, with a view to boosting returns. Asian US dollar bonds, especially the corporate credit, offer higher yields than their European and US peers for similar maturity and credit risks, he noted.

Most Asian countries are attractive in terms of yields, argued Hu, but Chinese, Indonesian and Indian US dollar bonds are particularly interesting, given their local investors’ strong home bias.

However, some argue that Asian bonds are too expensive for the yields they offer. Guillermo Osses, head of emerging-market debt at Man GLG, suggests Latin American markets offer better value, though he does like Indonesian bonds.

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Executives from asset owners and fund managers will join AsianInvestor's China Global Investment Forum in Beijing on September 22. For further information, visit www.china-investmentforum.com