The Japanese government’s pension investment fund will avoid renminbi-denominated Chinese government bonds from its $ 1.73 billion portfolio, citing liquidity problems and other risks in the world’s second largest economy.
The decision by the GPIF, the world’s largest pension fund, was unveiled on Wednesday in the minutes of its recent management committee meetings and taken against the background of increasing concern about the unacceptably high risk for mainstream investors of Chinese markets.
Relations between Tokyo and Beijing are also icy due to concerns about local security, increasing protectionism over the semiconductor industry and greater geopolitical tensions.
The decision appears to have a political edge, a person close to senior GPIF officials said, adding that liquidity could be a useful excuse, but the move likely reflects the management committee’s concerns about a public setback in Japan.
The manager of another large Japanese fund, which closely monitors its overall asset allocation on the GPIFs, said it still considers Chinese government bonds as investments and will not follow the same strategy.
In the minutes of the GPIF’s meeting held in July, it is shown that various committee members protested to spend funds on Chinese sovereign bonds in renminbi. Masataka Miyazono, GPIF president, concluded that there are three main risks: the relatively limited liquidity of the market; Chinese bonds are excluded from the international settlement system used for other sovereign notes; and non-Chinese investors were barred from trading futures trading.
When the GPIF committee met on September 22 — while world markets were ready for an interest payment term by the heavily indebted real estate group Evergrande facing a possible default, its members voted against any investment in government bonds in RMB.
The GPIF’s internal debate was sparked by the announcement in March that FTSE Russell, the index provider, would start phasing in Chinese debt in the world government bond index from October. GPIF has increasingly followed the benchmark in its efforts to secure returns beyond the ultra-low rates available in the local Japanese market.
FTSE Russell said this year that its decision to add China to the WGBI means its “arrival as a world market”.
Robin Marshall, the firm’s director of fixed-income research, wrote in a note that if private investors allocate funds to reflect the 5.25 percent index in China as it rises over three years from October By 2021, $ 130 billion to $ 158 billion of capital could flow to the Chinese government bond market.
Chinese 10-year notes, which yield 2.86 percent, have become increasingly attractive to some investors as the U.S. ten-year-old counterparty trades at a yield of 1.50 percent. Despite increasing pressure for better returns, the GPIF will be a standard for a version of the FTSE index that does not include Chinese debt.
The GPIF’s portfolio has undergone a dramatic transformation in recent years as the demands placed on it and the demographics of the oldest society in the world have become sharper. In 2008, the GPIF allocated two-thirds of the portfolio to domestic bonds and about 10 percent each to foreign equities and foreign bonds. From this year, the allotment of foreign and local equities and bonds aimed at 25 percent each.