Sovereign Asset Managers urged to explore potential diversification opportunities of onshore Chinese debt market

The global financial market landscape has evolved significantly over the last one and a half decades, creating new challenges and opportunities for sovereign asset managers. In the past, the capital preservation objective of sovereign asset holdings was achieved by placing deposits with AAA-rated counterparties and/or investing in traditionally safe havens like short-duration US Treasury bonds, German bunds, Japanese government bonds, and UK gilts. Over the past decade, the yields of these securities steadily declined to historical lows, some to levels below zero following successive rounds of quantitative easing from the world’s major central banks to reflate their economies from the negative effects of the Global Financial Crisis in 2008, and recently the COVID-19 pandemic. The coordinated quantitative easing programmes among central banks also led to an increase in correlations among sovereign bond markets, making it more difficult for bond investors to effectively diversify their bond portfolio risks. This has considerably compressed the scope for income generation and capital preservation from holding these instruments.

Amidst this gloomy background, China’s onshore government bond market is emerging as a new investment frontier for central bank reserves managers and sovereign wealth funds seeking potentially higher yields and greater safety with less volatility in their portfolios. The Chinese currency, the Renminbi, is now part of the Special Drawing Rights basket of currencies alongside the US Dollar, British Pound, Japanese Yen and the EURO. However, many of the sovereign asset managers in the MEFMI region are unfamiliar with the rapidly changing dynamics in China’s onshore government bond market, as well as the feasibility of adding these instruments to an asset portfolio. As part of its support to member countries’ efforts to achieve their objectives for sovereign asset management, MEFMI hosted a Webinar on 31 March 2022 in collaboration with Crown Agents Investment Management (CAIM). The Webinar discussed the dynamics of China’s onshore market, including ways in which China’s onshore sovereign bonds represent a unique set of investment opportunity and how this should shape the nature of asset allocation strategies of sovereign asset managers.

A total of 194 officials participated in the Webinar, drawn from 15 countries, including 13 MEFMI member countries, namely Angola,            Botswana, Eswatini, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Tanzania, Uganda, Zambia, and Zimbabwe. It raised awareness among sovereign asset managers on potential return enhancement opportunities and diversification benefits to be realised from allocating sovereign assets to the onshore Chinese government bond market. With this knowledge, sovereign asset managers are expected to be able to better evaluate onshore Chinese government bond market and inform asset allocation decisions to tap into the potential return enhancement and diversification opportunities that this market presents.

The Webinar was facilitated by three (3) resource persons from CAIM, comprising Mr. Roberts Grava (Chief Executive Officer), Mr. Slawomir Soroczynski (Senior Fixed Income Fund Manager), and Mr. Alan Cubbon (Head of Quantitative Strategies, Risk and Analytics).

Prepared by Tiviniton Makuve