CORRECT: Chinese Sovereign Debt May See More Inflows: Pictet
(Bloomberg) -- (Corrects first paragraph to say Chinese sovereign debt will benefit instead of rally.) Chinese government debt will benefit due to risk aversion by domestic money managers, and inflows from central banks and global funds into the world’s third-largest bond market, according to Pictet Asset Management.
- Yields are higher than inflation in an economy that’s not seeing a strong growth rebound, meaning the bonds have “a valuation story to tell,” Cary Yeung, the head of Greater China debt at Pictet, said in an interview
- Local investors prefer govt. and policy-bank bonds to corporate issuances given concerns over economic growth and defaults, while new rules have limited exposure of wealth- management products to stocks and non-standard credit products, Yeung said
- NOTE: Benchmark 10-year yield trades at 2.65% today, after reaching record low of 2.64% Monday, down from 3.55% a year ago. Inflation in July fell to 1.8% amid signs that an economic rebound is slowing. The inclusion of China’s yuan into the IMF’s SDR basket in Oct. is expected to spur central banks and fund managers to buy Chinese assets
- Manulife Asset Management said last month it wants access to China’s interbank bond market, while Fidelity Investment has bought more onshore govt. debt
- Chinese govt. debt offer relative value vs JGBs and other peers given the global low-yield environment, with some in negative-rate region: Yeung
- Foreign inflows into China’s bond mkt in June were likely driven by central banks. Portfolio managers would probably follow as they can’t afford to ignore nation’s $8t mkt
- NOTE: Amount of domestic RMB bonds held by overseas entities rose by 47.7b yuan ($7.2b) in June: PBOC data
- The inclusion of Chinese govt. debt into global indexes, once it happens, could attract $200b to $400b of inflows, Yeung said, citing market estimates
- Unless the dollar index surges, yuan will probably remain stable toward yr-end even with a Fed rate hike, Yeung said
- Yuan declining further would lead to a currency war, and continued expectation of depreciation would also spur capital outflow and raise systemic risk
- Yuan will be supported ahead of the G-20 summit on Sept. 4-5 and SDR inclusion in short term, and China’s trade surplus in long term
- NOTE: CNY little changed today at 6.6363 per dollar, falling 2.18% YTD
- Pictet Asset Management, which owns Chinese government debt, managed $159b of assets worldwide as of end-June
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