Pol­icy banks bonds snapped up

Gov­ern­ment re­vises tax levies on off­shore in­vestors

Global Times - Weekend - - FRONT PAGE -

As China opens up its $12 tril­lion bond mar­kets to off­shore in­vestors, a re­cent tax change is tempt­ing for­eign in­vestors to look be­yond the safest gov­ern­ment bonds and to fo­cus on debt is­sued by the coun­try’s pol­icy banks.

Of­fi­cial data shows for­eign money is trick­ling into bonds is­sued by the State-owned pol­icy lenders such as China De­vel­op­ment Bank (CDB) and the Ex­port-Im­port Bank of China (Ex­imBank), and off­shore in­vestors say they are con­sid­er­ing fur­ther in­vest­ments in these bonds.

Known as pol­icy-bank bonds, these in­stru­ments of­fer higher yields than debt is­sued by the cen­tral or toprated lo­cal gov­ern­ments. But for­eign­ers have had to pay taxes of as much of 16 per­cent on their in­come from bonds, with the ex­cep­tion of out­right gov­ern­ment debt.

The Chi­nese cen­tral gov­ern­ment changed that cal­cu­lus in Au­gust, say­ing it would waive taxes for off­shore in­vestors in China’s do­mes­tic bond mar­ket for three years, though it didn’t spec­ify when the tax change would take ef­fect.

“We have in­creased our ex­po­sure to pol­icy banks over the last three months,” said Jean-Charles Sam­bor, deputy head of emerg­ing mar­ket debt at BNP Paribas As­set Man­age­ment, whose team man­ages $3.5 bil­lion of in­vest­ment.

“We think that it’s a nice yield pickup with no ad­di­tional credit risk com­pared to cen­tral gov­ern­ment bonds. And now that the tax­a­tion regime has been clar­i­fied, it will be pos­i­tive,” said Sam­bor.

For now, BNP is just one among the rel­a­tively few large in­vestors in­creas­ing ex­po­sure to pol­icy bank bonds. Sev­eral oth­ers are wait­ing for clar­ity on the re­cent tax changes.

CDB’s 10-year bonds yielded 4.268 per­cent on Fri­day, com­pared with 3.655 per­cent for 10-year sov­er­eign bonds, ac­cord­ing to Thom­son Reuters data. A 16 per­cent tax elim­i­nates that yield pre­mium. Off­shore in­vestors held 330.6 bil­lion yuan worth of pol­icy bank bonds in Au­gust, mostly is­sued by CDB, ac- cord­ing to data from China Cen­tral De­pos­i­tory and Clear­ing Co, up just 3 per­cent since the end of 2017. In con­trast, off­shore in­vestors held 1.03 tril­lion yuan worth of cen­tral gov­ern­ment bonds, 70 per­cent more than at the end of 2017.

CDB, China’s pol­icy lender re­spon­si­ble for large in­fra­struc­ture in­vest­ment at home and over­seas, is the big­gest is­suer of the three pol­icy banks, with 7.75 tril­lion yuan worth of bonds out­stand­ing in the on­shore mar­ket, ac­cord­ing to Thom­son Reuters data.

It has A+ long-term is­suer rat­ings from agen­cies Fitch and S&P, equal to China’s sov­er­eign rat­ing.

Hay­den Briscoe, head of Asia Pa­cific fixed in­come at UBS As­set Man­age­ment, said off­shore in­vestors were just start­ing to in­crease their port­fo­lio al­lo­ca­tions to pol­icy bank bonds from a low base.

“This is the start of the in­sti­tu­tional flow you’re start­ing to see now,” Briscoe said.

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