By Ingrid Melander
LONDON Aug 10 Sovereign wealth funds are
increasingly interested in buying China's domestic bonds to get
a bigger foot in the world's second largest economy, benefit
from good yields and diversify their exposure to more
Despite concerns over China's slowing growth, the giant
industry, which manages countries' windfall revenues for future
generations, is taking advantage of the gradual opening up to
foreign investors of its mainland bond market worth over $3
Norway's sovereign wealth fund said on Friday it had
increased its exposure to Chinese government bonds, had already
reached the ceiling of its quota for onshore Chinese assets and
was seeking to increase it.
"The onshore Chinese market is bigger than the (German) bund
market, bigger than the (UK) gilt market and these guys have
hardly any exposure to onshore renminbi," said Gary Smith,
global head of official institutions at BNP Paribas Investment
Partners. It "is something they are very very keen to be
The domestic, so-called "onshore" market is a
highly-regulated market for yuan-denominated sovereign and
corporate bonds providing limited access for foreigners, with
only a restricted number of overseas institutional investors
allowed to buy. It offers a much bigger pool of assets than
bonds traded freely outside of mainland China in the so-called
Sovereign wealth funds, whose assets are estimated at $3-4
trillion, are increasing their exposure to emerging markets in
their hunt for better returns in the midst of the euro zone's
debt crisis and slowing global growth.
They can buy into China's domestic bond and equities market
through its Qualified Foreign Institutional Investor (QFII)
system of licenses and quotas, which Beijing loosened on July 27
when it published new rules that allow investment in the
interbank market, where most bonds trade.
This follows moves to grant more licences and increase the
quota for the overall QFII programme from $30 billion to $80
billion earlier in the year, and comes after China began
allowing foreign central banks in 2010 to directly invest in its
domestic interbank bond market, outside the QFII system.
"Sovereigns in general are underexposed to Chinese assets
and given the flat equities in China and decent yields you can
get on bonds they are diversifying into that," said Andrew
Economos, head of sovereign and institutional strategy for Asia
at JP Morgan Asset Management.
Chinese bonds offer yields from 4 percent to double-digits
depending on the quality, with sovereigns more interested in the
lower-yielding, higher quality ones, he said.
"We have seen more and more sovereign fund requesting quotas
and increasingly they are receiving licenses," he said. "It has
been occurring, rather selectively but with increased
Asian sovereigns understand the Chinese opportunity better
and have shown more interest, with European and Middle Eastern
ones following now, Economos said.
JPMorgan Asset Management is, together with BNP Paribas,
among the 172 financial institutions which had a licence to buy
Chinese securities through the QFII system as of end June.
Some of the world's largest sovereign wealth funds, Abu
Dhabi's Investment Authority and Singapore's GIC have such
licences to buy Chinese bonds themselves without going through
Qatar has applied for a $5 billion quota in the QFII scheme,
the official China Securities Journal reported in June.
Among central banks, Bank Indonesia has started investing in
China's interbank bond market and on July 1 the official Xinhua
news agency reported that Korea had begun making purchases.
Neither have said how much they were buying.
"We do have a lot more interest from other central banks and
sovereign wealth funds," said Becky Liu, Hong-Kong based HSBC
Asian fixed income strategist, adding that she could not mention
names for confidentiality reasons.
"The domestic market has been opening up much faster this
year, and has therefore attracted much more interest from
foreign investors," said Liu, adding that on top of direct
purchase by central banks, "some countries prefer to buy from
the sovereign wealth funds."
China's main bond clearinghouse publishes a data series
widely considered to be a proxy for foreign holdings of Chinese
interbank bonds. That figure stood at 96 billion yuan ($15
billion) at the end of June, up from 87 billion yuan at the end
of 2011, out of a total of 22 trillion yuan of outstanding bonds
in China's interbank market.