Hong Kong’s chief executive Carrie Lam this month announced sweeping reforms to the Mandatory Provident Fund (MPF) aimed at boosting returns through a tilt towards Chinese government bonds.

At an annual policy address on October 6, Lam announced MPF reforms that also included changes to the MPF offsetting regime, policies concerning MPF withdrawal, the scope of investments and the timeframe for an electronic platform.

Lam said the government would facilitate MPF investments in China’s government and policy bonds but provided no further details.

Welcome initiative

Experts welcomed the initiative, saying that Chinese government bonds were now part of the global investment firmament and that it was time MPF followed suit.

Paula Chan, Manulife IM

“Under the current Mandatory Provident Fund Authority (MPFA) regulations, the issuer concentration for Chinese government bonds is limited to 10%," Paula Chan, senior managing director and senior portfolio manager for fixed income Asia at Manulife Investment Management (Manulife IM), told AsianInvestor.

"Given the growing importance of China government bonds to global markets with the adoption and inclusion of China bonds in global market indices, we believe this is an issue that needed to be addressed,” she said. 

Stable returns

She said she believed investing in China government bonds was likely to bring stable returns to MPF funds.

China government bonds will be officially included in the FTSE World Government Bond Index at the end of this month, with analysts hailing the move as a step towards an increasingly greater role for China bonds in global investments.

Analysts have said that China government bonds provide an attractive yield premium over comparable developed-market bond yields, displaying lower volatility than similarly rated sovereign bond markets.

"We favour Chinese sovereign bonds due to low inflation, likelihood of further central bank stimulus and attractive yields," according to Luca Paolini, chief strategist at Pictet Asset Management, noting in a recent report.

Year-to-date, 10-year China government bonds have experienced a 17bps rise. This compares with a 74bps and 56bps rise in comparable maturity US and UK sovereign bond yields, respectively, according to a Goldman Sachs report.

Source: Goldman Sachs, April 2021 report

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BALANCING

The emergence of a fixed income strategy in the China market was also welcomed as a counter to the volatility of Chinese equities which still remain attractive among funds.

HK & China Equity Funds, Global Equity Funds and US Equity Funds gained the highest level of net inflow in Q3 2021, attracting 164.1% of MPF’s net inflows, according to MPF Ratings’ data. 

Francis Chung, MPF Ratings

MPF members, however, suffered losses from a falling Hong Kong equity market, underscoring the importance of diversification over the longer term.

Francis Chung, chairman of MPF research group, MPF Ratings, told AsianInvestor that "members who aggressively try to time markets and do so at the wrong time, will not only produce disappointing returns but they also expose themselves to further losses".

"Members need to understand it is diversification, and 'time in market' not 'market timing', which produces long-term consistent returns, he said, adding that members should balance their portfolios through a number of mixed-asset funds.

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Withdrawal changes

As part of the reforms, Lam said the government would explore ways of encouraging the public to withdraw their MPF money on a regular basis rather than as a lump sum so that seniors could enjoy a steady income throughout their retirement.

Experts believe that members should examine different ways of investing their retirement nest eggs.

“Withdrawing MPF money as a lump sum and putting it into bank deposits will mean it will eventually lose its value over time. Members should think about the power of compound interest, investing part of their retirement money in income-generating solutions,” according to a spokesperson from Manulife IM.

Meanwhile, Lam said the government would fully support implementation of eMPF, an electronic platform that aims to standardise and streamline administration for over 4.5 million MPF members in the city.

The platform is scheduled to become fully operational by 2025, she noted.

“eMPF will streamline administrative procedures and bring convenience for members, employers and the self-employed. The investment market changes rapidly, and members should regularly review their MPF portfolios to ensure their investments are keeping up with the times,” according to the Manulife IM spokesperson.