Chinese Government Guaranteed Bonds Will Boost MPF Yields in 2022 | Asset owners
The Hong Kong government’s plan to ease restrictions on its $ 154 billion pension plan to invest in Chinese government bonds and political banks may help boost performance and provide diversification benefits, said experts from the city’s Mandatory Provident Fund (MPF).
If the implementation goes well, the industry will also support the gradual opening up to other Chinese government issuers, such as state-owned enterprises and local governments, they said. Asian investor.
Hong Kong Financial Services and Treasury Office announced at the end of December that it would amend the current legislation governing MPF investments to include the central government and three bank obligations within the scope of “exempt authority”.
The three banks are the Development Bank of China, the Import-Export Bank of China and the Agricultural Development Bank of China.
The amended legislation will enter into force no earlier than mid-2022, if passed by the Legislative Council.
The original plan was announced in the last political speech in October of last year and aimed to provide diversified and secure investment options and returns to the city’s retirement savers.
Bonds not issued by the “exempt authority” must have a certain level of credit rating at the individual bond level to become authorized investment subjects of MPF. “Since individual bonds issued by central government and strategic banks may not all be rated credit, the above requirement in effect has limited the MPF’s investments in these bonds,” said Christopher Hui Ching -yu, Secretary of Financial Services and Treasury.
As of September 30, 2021, the relevant investments represented only 0.27% (2.6 billion Rmb) of the total value of MPF’s assets, far less than its investments in bonds issued by commercial institutions on the continent (23 billion Rmb, or 2.41% of total MPF asset value), Hui noted in the Dec. 22 announcement.
Under the amended legislation, each MPF fund can invest up to 30% of its funds in bonds of the Chinese government or strategic banks of an issuer. It can also choose to invest all of its funds in these bonds from at least six different issues.
Paula Chan, Manulife GI
“Due to their low correlation with other investments, Chinese government bonds and bonds of strategic banks have been able to offer diversification benefits to investors. At the end of the day, Chinese bonds are attractive because they offer opportunities to improve yield and reduce overall portfolio risk, ”said Paula Chan, senior portfolio manager for fixed income in Asia at Manulife Investment. Management.
The 10-year Chinese government bond (CGB) yield is currently around 120 basis points higher than the equivalent Hong Kong government bond and 115 basis points higher than the bond. equivalent US Treasury.
For strategic banks, yield spreads are higher. For example, the Development Bank of China Jan 27 bond yields about 2.9%.
“We agree that 2022 will continue to be a difficult environment for investors due to a number of uncertainties in the market,” Chan said. Asian investor.
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“Given the generally weaker outlook for the Chinese economy in 2022, there are good reasons for China to pursue moderate easing of its fiscal and monetary policies to support the economy. As interest rates in China are expected to remain low, this is a positive part of the interest rate cycle to invest in Chinese bonds, as lower interest rates will help generate positive performance in China. the asset class.
“We believe the time is right to gradually increase exposure to Chinese government bonds and political banks,” she said.
Willis Towers Watson
According to Morningstar data, the overall return of the MPF was 0.9% in 2021. “Under the continued influence of the pandemic, we expect uncertainties in the market this year, so it is very important to continue to diversify investments, “Charlotte Chan, head of distribution, the Hong Kong workplace and personal investment at Fidelity International, said Wednesday in a note.
Noting that recent Chinese bond defaults particularly affected the private and real estate sectors, Raymond Kwong, Asia investment director at Willis Towers Watson, said CGBs and bonds of strategic banks pose low downside risk. default, and their inclusion in MPF bonds and multi-asset funds is not expected to significantly increase the overall credit risk profile, although there is currency risk against the Hong Kong dollar.
“Although China has a slightly lower credit rating, it is expected to have a higher diversified economic growth potential than Hong Kong,” Kwong said.
The Hong Kong government will keep an open mind about the future inclusion of bonds issued by other government institutions on the mainland. Kwong believes that local government bonds are a large number of bonds outstanding in China. But since they are not explicitly guaranteed by the Chinese government, it may take time for the Hong Kong government to consider such inclusions, he noted.
“It should be done gradually over time. But ultimately, expanding the investment universe to include government enterprise bonds (SOE) and possibly private enterprise bonds (POE) from other dynamic sectors and economic regions of the world. Mainland China would be attractive to longer-term MPF investors, ”Manulife said. Chan.