E Fund: China's potential tightening poses risk

Added 1st August 2016

Minor tightening in China’s monetary policy could pose big risks for onshore bond investments, said Jeffrey Qi, portfolio manager at E Fund Management in Hong Kong.

E Fund: China's potential tightening poses risk

“Since last year, the central bank has been keeping a very stable monetary policy with loosening liquidity, and investors have started to utilize the low funding costs to do carry trades and leverage activities.

“Once this one-way policy is changed, although the material impact might not be significant, it could cause panic among investors,” he told FSA.

Qi runs two bond mutual funds in Hong Kong, as well as other RQFII bond funds available in the US and Europe.

“Coupled with the pressure on yuan depreciation, we also worry that the central bank may tighten monetary policies to cope with the exchange rate,” he added.

Last summer, when regulators moved to crack down on leverage used by investors in the A-share market, the resulting market plunge wiped out $5trn in market capitalisation.

Other risks include a pick up of inflation, which might be led by rising rents and home prices. But the chances of inflationary risk are small, he noted. “Although we have seen some price increases in the property market, the developers have remained cautious in terms of investing more.”

Based on these concerns, he takes a neutral approach to investment bonds, although he believes the slowdown in the mainland economy will favour bonds in general. For instance, he has avoided credit bonds with medium to low ratings since the beginning of this year, and invests mainly in government-related bonds.

JP Morgan Asset Management global market strategist Marcella Chow said in a report that although “the overall strength of economic data in June means policymakers will likely refrain from ramping up policy easing. However, it is still too early to worry about tightening, especially as inflation remains steady.”

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