Oct 14, 2016

China's bond market 'too big to ignore', says Insight CIO - Citywire

The Chinese government bond market is opening up and soon it will be too large to ignore, according to Adrian Grey, chief investment officer at BNY Mellon company Insight Investment.

The Chinese bond market is the third largest in the world behind the US and Japan. Over the last year it has opened its debt market to international investors to buy onshore bonds and joined the IMF’s reserve currency basket, the Special Drawing Rights (SDR).

Speaking at a media briefing in New York on Wednesday, Grey said: ‘The Chinese have made it much more straightforward for people like ourselves to access their domestic bond market. They are actively encouraging large foreign players, [like] asset managers, to come and buy in their bond market.’

Investors were unlikely to consider Chinese bonds as they could only be accessed from an offshore perspective. Now its currency has joined an international standard like SDR, investors are much more interested, said Grey. He added that yields in China are much higher than Japan or Europe.  

Despite eyeing the investment the Grey said his team has hesitated to jump with both feet just yet.

‘We are active in that market. It’s not yet at the stage where you can go in and buy however much you want and sell however much you want or anything like that.

‘You need to be a little circumspect about just charging in. We’re not huge bulls on China but we’ll be keeping tabs to how we take advantage of it going forward. It is literally too big to ignore going forward,’ said Grey.

Bubble territory

Concerns over a bond bubble and the future of liquidity in the market has Grey and the Insight Investment portfolio manager team looking to securitized debt and customized credit solutions.

‘Yes, there is a bubble. How inflated is that bubble? Can it get more inflated? Can it pop? It’s difficult to put a timeline on it… we’re in world where, as a consequence of policy, in any historic context valuations are extreme.’

He added that there will be a rush to the door, so the best an investor can do is ensure their affairs are in order so they can ride it out.

‘The fact of the matter is that if you want to exit fixed income markets in a hurry, that door is going to be pretty small and there’s going to be a lot of people trying to get through it at the same time.’

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