For­eign re­serves to add $48b China bonds


For­eign in­vestors’ pur­chases of Chi­nese bonds will prob­a­bly surge more than four­fold in the com­ing two years as global cen­tral banks di­ver­sify their re­serves.

Mone­tary au­thor­i­ties and supra­na­tional or­ga­ni­za­tions will lead buy­ing of about $48 bil­lion in 2017 and 2018, ac­cord­ing to a Bloomberg News sur­vey of 11 an­a­lysts. That’s more than four times the $12 bil­lion of the whole of last year. In­flows have slowed to $8 bil­lion so far in 2016 as the yuan’s 4.2 per­cent de­cline sapped in­vestor con­fi­dence.

“There’s still huge po­ten­tial for re­serve man­agers to di­ver­sify slowly their re­serves into the yuan,” said Paul Mackel, head of emerg­ing-mar­kets cur­rency re­search at HSBC Hold­ings Plc. “The ap­petite from real money man­agers, such as pen­sion funds and mu­tual funds, is again very, very high. If China is even­tu­ally in­cluded in ma­jor bond in­dexes, it could bring an av­er­age $80 bil­lion-$100 bil­lion an­nu­ally over the com­ing years.”

While China opened up its bond mar­kets in prepa­ra­tion for the yuan’s en­try into the In­ter­na­tional Mone­tary Fund’s Spe­cial Draw­ing Rights on Oct 1, cap­i­tal in­flows have seen a lim­ited im­pact. The sce­nario will change over time, with the Chi­nese cur­rency ac­count­ing for as much as 10 per­cent of the world’s $11 tril­lion of for­eign-ex­change re­serves in a decade’s time, ac­cord­ing to Eswar Prasad, a Cor­nell Univer­sity pro­fes­sor and for­mer head of the IMF’s China di­vi­sion.

Nine of the Bloomberg News sur­vey’s 11 re­spon­dents put more than even odds of Chi­nese govern­ment debt be­ing added to ma­jor bond in­dexes by the end of 2018. In­clu­sion would help bring $750 bil­lion of in­flows in the next 10 years, ac­cord­ing to the me­dian es­ti­mate in the poll.

PBOC Deputy Gov­er­nor Pan Gong­sheng said ear­lier this year that China will push for the in­clu­sion of do­mes­tic notes in global mea­sures such as those com­piled by Cit­i­group Inc and JPMor­gan Chase & Co. Cit­i­group said that it is seek­ing client feed­back that can be used in any po­ten­tial re­view, while JPMor­gan said it has placed Chi­nese on­shore govern­ment bond­son­re­viewto be in­cluded in its emerg­ing-mar­ket in­dexes.

Chi­nese sov­er­eign bonds have handed in­vestors a profit in all but one of the past 11 quar­ters amid an as­set famine, with a to­tal re­turn of 25 per­cent in the pe­riod. The main­land’s bench­mark Shang­hai

There’s still huge po­ten­tial for re­serve man­agers to slowly di­ver­sify their re­serves into the yuan.” head of emerg­ing-mar­kets cur­rency re­search at HSBC Hold­ings Plc

Paul Mackel,

Mone­tary au­thor­i­ties and supra­na­tional or­ga­ni­za­tions are pre­dicted to lead the buy­ing of Chi­nese bonds in 2017 and 2018

Com­pos­ite In­dex of stocks is down 12 per­cent for the year, the govern­ment is mov­ing to curb ris­ing prop­erty prices, while chan­nels for mov­ing money abroad have been choked as pol­icy mak­ers look to dis­cour­age the flight of cap­i­tal.

SDR-driven in­flows are al­ready show­ing signs of pick­ing up, with for­eign in­vestors’ hold­ings of Chi­nese on­shore sov­er­eign debt ris­ing a record $6 bil­lion in Septem­ber, ac­cord­ing to data from China Cen­tral De­pos­i­tory & Clear­ing Co. Many have been drawn by the na­tion’s higher yields: China’s bench­mark 10-year sov­er­eign debt yields 2.70 per­cent, com­pared with 1.72 per­cent in South Korea, 1.85 per­cent in the US and close to zero in Ger­many. The off­shore yuan was trad­ing at 6.7859 per dol­lar ear­lyMon­day.

“The IMF’s ac­knowl­edg­ment of the yuan as a freely us­able cur­rency en­ables cen­tral banks to count yuan as­sets as part of their of­fi­cial re­serves, rather than just for­eign-cur­rency as­sets,” said Becky Liu, se­nior greater China rates strate­gist at Stan­dard Char­tered Plc. “The na­ture of re­serves in­vest­ment is to get ex­po­sure to re­serve cur­ren­cies, in­stead of hedg­ing ev­ery­thing back to the dol­lar.”

Pri­vate play­ers are on the way too. Pa­cific In­vest­men­tMan­age­ment Co will prob­a­bly be on­shore in China in a year or two, Asia Pa­cific head Eric Mo­gelof said at the Bloomberg Mar­kets Most In­flu­en­tial Sum­mit in­Hong Kong on Sept 28.

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