Renminbi-denominated sovereign bonds are avoided by Japan’s state pension fund.

Japan’s Government Pension Investment Fund will shun renminbi-denominated Chinese sovereign bonds from its $1.73tn portfolio, citing liquidity concerns and other risks in the world’s second-largest economy.

The decision by the GPIF, the world’s largest pension fund, was revealed on Wednesday in the minutes of its recent management committee meetings and taken against a backdrop of mounting concern about the unacceptably high risk to mainstream investors of Chinese markets.

Relations between Tokyo and Beijing are also frosty owing to regional security concerns, increasing protectionism over the semiconductor industry and wider geopolitical tensions.

The decision appeared to have a political edge, a person close to senior GPIF officials said, adding that liquidity might make a useful excuse but the move probably reflected concerns by its management committee of a public backlash within Japan.

The manager of another large Japanese fund, which closely models its overall asset allocations on the GPIF’s, said it continued to regard Chinese government bonds as investible and would not follow the same strategy.

Minutes of the GPIF’s meeting held in July show various committee members argued against funnelling funds to renminbi-denominated Chinese sovereign bonds. Masataka Miyazono, GPIF president, concluded that there were three main risks in doing so: the comparatively limited liquidity of the market; Chinese bonds are excluded from the international settlement system used for other sovereign notes; and non-Chinese investors were barred from futures trading.

When the GPIF committee met on September 22 — as global markets were bracing for an interest payment deadline by the heavily indebted Chinese property group Evergrande that faces a potential default — its members voted against any investment in RMB-denominated government bonds.

The GPIF’s internal debate was brought to a head by the announcement in March that FTSE Russell, the index provider, would begin phasing Chinese debt into its world government bond index from October. GPIF has increasingly followed the benchmark in its effort to secure yields outside the ultra-low rates available in the domestic Japanese market.

FTSE Russell said this year that its decision to add China to the WGBI marked its “arrival as a global market”. 

Robin Marshall, the company’s director of fixed income research, wrote in a note that if private investors allocated funds to reflect China’s 5.25 per cent weighting in the index as it was phased-in over three years from October 2021, $130bn-$158bn of capital could flow into the Chinese government bond market.

Chinese 10-year notes, which yield 2.86 per cent, have become increasingly attractive to some investors as the US 10-year counterpart trades with a yield of 1.50 per cent. But despite the mounting pressure for better returns, the GPIF will benchmark to a version of the FTSE index that does not include Chinese debt.

The GPIF’s portfolio has undergone a dramatic transformation over recent years as the demands placed upon it and the demographics of the world’s oldest society have become more acute. In 2008, the GPIF allocated two-thirds of the portfolio to domestic bonds and about 10 per cent each to foreign equities and foreign bonds. As of this year, the allocation to foreign and domestic stocks and bonds were targeted at 25 per cent each.

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