Offshore asset and wealth managers are lukewarm about the near-term potential for greater focus on Chinese domestic bonds despite the recent inclusion of the gargantuan market, citing nascency and existing exposure as roadblocks.
«There’s been a lot of excitement in the market because of the recent index inclusion,» said Lee Homin, head of portfolio solutions and Asia macro strategist at Lombard Odier, during the second annual Fixed Income Leaders Summit in Hong Kong on Wednesday.
«But the market itself has to prove its diversification benefits. It has to emerge as a reliable risk factor for use in portfolios,» he added.
Countered With Skepticism
Despite the sheer size of China’s domestic market, estimated at $13 trillion, industry participants believed that a lack of track record demonstrating distinct and beneficial behavior deemed it unnecessary to aggressively explore opportunities for greater or more granular allocations to the asset class.
Whilst a panel moderator highlighted a decoupling between Chinese and U.S. government bond yield curves as potential distinction, Lee countered with skepticism.
«[Buying into that] is maybe just a convoluted way to get exposure to EM,» he responded. «There’s no doubt about the future potential of this space and we will continue to monitor its developments. We are going to get there but I don’t think we are there yet in terms of China as a risk factor.»
Too Early For Bonds
«It took a decade to build confidence and understanding in trading Chinese equities through A-shares and Stock Connect,» said Freddie Chen, managing director and head of portfolio review, China at Vanguard Investments.
«It’s too early for bonds. It’s still premature to have a standalone country ETF focused on China bonds alone,» he added.
Long, Long Way to Go
China continues to rapidly launch new initiatives to further advance market internationalization, including its Stock Connect and Bond Connect programs to allow foreign investors access to its domestic equity and fixed income markets. An ETF Connect program was floated but was shelved due to technical issues.
Despite progressive thinking, the industry believes that it will take more than a few years for Chinese bonds to emerge as a major asset class in global portfolios.
Bonds Will Follow
«When we look at China, we don’t see investors get that granular yet,» echoed Thomas Taw, vice president and head of iShares investment strategy, APAC at Blackrock.
«They are already getting access through broader indices. We haven’t seen that much demand on the equity side yet and bonds will follow later,» he said.
Fit Into the Asset Allocation Strategy
Goldman Sachs' Asia discretionary mandate head Jacky Tang highlighted that portfolio managers to be aware of the total wealth of the client including existing renminbi exposure or exposure through single bond trading.
«Of course the broader the scope of your market universe, the better it is for investors,» noted Tang, Asia head of portfolio management and co-head of investment strategy group at the bank. «But it has to fit into an asset allocation strategy. And our clients are offshore investors,» he concluded.
