UK-based Insight Investments, a boutique firm under BNY Mellon, began priming itself to be one of the first to take advantage of China’s interbank bond market (CIBM), which is about to open to foreign institutional investors.
After completing the registration process, which it began in June, the firm will make its first investments in central government bonds in the next few weeks and is also considering taking positions in policy banks – the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China – in the near future.
Simpson, portfolio manager on the emerging markets debt team, said that with the market opening at a more rapid pace than was initially expected, the team was keen to buy onshore paper at the earliest possible opportunity.
“This is a bond market that’s enormous – one of the biggest in the world – and we want to be at the forefront of that,” he said.
“We wanted to be one of the first in there because it makes sense for global bond investors – on a short-term horizon the Chinese market still offers value and the near-term return potential is attractive.
“From a macro point of view, we’ll stick with the government bond market but over time we’ll build up our exposure in the corporate space.”
China bond defaults, however, are picking up. China had more defaults in the first quarter than in all of 2015. More are expected as the government works to get rid of unprofitable state-owned companies being kept alive through state subsidies.
Other investor concerns are about the lack of transparency, particularly with provincial government bonds.
Simpson said the macro fundamentals the investment team has been studying are the same as it would look at in any emerging market, with inflation profile, central bank function, who the major bond investors are and which bonds are most liquid at the top of the list.
Although the potential for defaults and perceived opaqueness may have put some investors off the Chinese market, Simpson believes many of the fears are unfounded.
“The ease of doing this has been a nice surprise,” he said. “The market is more liquid than people might expect. It’s a new market for foreign investors but it’s a very well-developed market for domestic institutions.”
Simpson believes other investors will follow.
“Most people over time won’t be able to ignore this because it continues to make sense in terms of offering opportunities for clients interested in global bond investing,” he added.