Politics Play a Role in GPIF’s Rejection of Chinese Government Bonds | Asset owners


The political tension between China and Japan cannot be dismissed when it comes to the decision of the world’s largest pension fund to avoid Chinese government bonds, some experts say.

Japan’s $ 1.7 trillion Government Pension Investment Fund (GPIF) has decided to exclude CGBs from its benchmark foreign bond index, the FTSE Russell World Government Bond Index (WGBI). The WGBI is expected to include the CGBs from the end of October, for a period of three years.

Integrating CGBs into the GPIF portfolio will pose significant risks, with settlement issues and limited liquidity for a fund with such a scale of investment, Chairman Masataka Miyazono said at a board meeting of administration in July, according to a report published in late September.

Dong Chen,

Pictet wealth management


“I think the reasons [GPIF cited] are irrelevant. I think it’s a political decision rather than a regular decision based on investment [strategies]Said Dong Chen, Hong Kong-based senior economist for Asia at Pictet Wealth Management.

Thu Ha Chow, Singapore-based portfolio manager for emerging market debt at US asset manager Loomis Sayles, agreed that politics “always lurk in the background” when it comes to a big decision. such as GPIF, noting that geopolitical tensions would affect clients. investment strategies, as they affect a country’s attitude towards foreign investors.

Chen noted that Donald Trump ordered federal pension funds to halt investment plans in China while in the White House. Given the current Sino-U.S. Tensions, China’s diplomatic relations with Japan, an important ally of the Biden administration, would be relatively difficult, Chen noted.

China was once the largest foreign holder of U.S. Treasuries, with holdings of up to $ 1.3 trillion. Positions were gradually reduced after 2018 to currently stand at around $ 1.06 trillion. On the other hand, Japan replaced China to become the United States’ largest creditor since June 2019. It now holds $ 1.28 trillion in US sovereign papers.

“I believe [this] partly reflects a difference between China and Japan in their relations with the United States, ”Chen said.

In response to AsianInvestor, a GPIF spokesperson denied any connection between the decision and the ongoing drama surrounding indebted Chinese real estate developer Evergrande Group. The spokesperson did not say whether any political consideration was at the origin of this decision.

At the end of June, 24.7% of GPIF’s assets, or $ 425.7 billion, were in foreign bonds.

Data as of March 31. Source: GPIF (Click for full view)


The Chinese bond market is much more open than before, and there are hardly any restrictions for interested foreign institutional investors, especially for a giant pension fund like GPIF – thanks to factors such as the relaxed regime. Foreign Qualified Institutional Investors (QFII) and the launch of the Bond Connect program in 2017, Chen noted.

At the end of August, foreign institutions held 3.58 trillion Rmb ($ 555.6 billion) of Chinese onshore bonds, up 38% year-on-year, accounting for 3.8% of total Chinese bonds. Of the 3.58 trillion Rmb, 2.2 trillion Rmb were in Chinese government bonds, according to the China Central Depository and Clearing (CCDC).

“The holdings of foreign investors in CGBs are steadily increasing,” Chen said. “As the world’s second largest bond market [with over $18 trillion in size], I don’t see any liquidity problem, especially [for] sovereign debt, ”Chen said.

Fund managers said AsianInvestor that it took more than a year for foreign investors to complete the full setup of the CGB negotiation and settlement process. In recent years, the lead time has been reduced significantly to less than two months, although this is still longer than the few days in some developed markets.

The current yield on 10-year Chinese government bonds is 2.9%, while the 10-year US Treasury yield is 1.6%. The yield on the German Bund is -0.15%.

Thu Ha Chow,

Loomis Sayles


Japanese institutional investors, especially in the public sector, tend to be more cautious in nature, Chow noted. The GPIF decision was just a bad time, she said, citing all the risks and uncertainties that have emerged from the China slowdown, the Evergrande incident and the overhaul of regulations in various sectors.

It is also not uncommon for conservative investors to refrain from becoming the first to adopt a bond instrument newly included in a major index, she added.

“I hope that in the long term, because China is such a big market, some people will eventually accept [CGBs]. It just takes time, ”Chow said.

Standard Chartered Bank has estimated that passive inflows related to the inclusion of the WGBI could be reduced from $ 2.9 billion to $ 3.6 billion per month, from $ 3.6 billion to $ 4.3 billion, if the GPIF n ‘not one of them.

The impact on China’s sovereign debt market would be limited. On the contrary, the impact would be felt more in the Japanese public sector than in the private or global space, Chow said.

Diego López, World SWF

Currently, the WGBI is used exclusively by Japanese investors as a benchmark, in part because it is used by the GPIF, while the Bloomberg Barclays index is more widely used by global investors, the GPIF noted at its meeting. from the administration board.

In addition, with the inclusion of CGBs in the WGBI taking place over a three-year period, GPIF believes that its decision not to invest in something it has not set foot in would have a minor impact on the market. .

At the end of March, GPIF’s exposure to Chinese bonds was minimal at $ 163 million, of which $ 54 million was in Evergrande, which represented 0.04% of its foreign bond portfolio, and 0.01% of its 1, $ 7 trillion in assets under management, noted Diego López, managing director of Global SWF, a data tracking platform for global sovereign wealth funds and public pension funds.

“I wouldn’t say (not investing in CGBs) is a change in strategy or policy, but a continuation of what they were already doing,” López said. “If we’re talking about reducing exposure to China as a whole, where GPIF has $ 19.1 billion in Chinese listed stocks and 22% of its small private equity portfolio, that would be a whole different story.

“But as it is now, I’m not sure there is [new] political consideration, or that it will affect the bond market or the performance of GPIF in the foreign bond portfolio, ”he said.

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