Speaking at a luncheon in Sydney yesterday, AllianceBernstein director of Asia Pacific fixed income Hayden Briscoe said the large size of the Chinese bond market means investors will have to give a higher allocation to Chinese government bonds once the renminbi currency is internationalised in order to maintain index weightings.
Mr Briscoe said the Chinese government bond market is worth around $4 trillion, so placing Chinese bonds into any typical global index will give you an allocation of about 12 per cent.
“The only reason Chinese government bonds haven’t been bought is because they’re not in the market cap weighted indexes. As soon as the currency is internationalised those bonds will go into the indexes,” he said.
Mr Briscoe said he believes higher asset allocation by institutional investors to government bonds will be a strong trend in the next 10 years, and that he is already seeing increased interest.
“One of the most conservative organisations in Australia – the RBA – is putting five per cent of their foreign exchange reserves into Chinese government bonds,” he noted.
He said he is perplexed that many investors still have a zero allocation to the Chinese government bonds when they are “currently yielding at 4.5 per cent, have very low to stable inflation and relatively good growth”.
Mr Briscoe believes some investors are too focused on China’s short- to medium-term challenges and the impact they might have on the country’s growth.
He said, from a long-term bond investment perspective this could mean “missing the bigger picture about how China’s economic and financial reforms – including, most importantly, the internationalisation of the renminbi – are going to affect investors in Australia and globally”.
