A $1.8 Trillion Fund Manager Explains Why It's Plowing More Money Into China
A $1.8 Trillion Fund Manager Explains Why It's Plowing More Money Into China
(Bloomberg) --
One of the largest U.S. fund managers says China’s domestic bond market offers a healthy dose of diversification, and plans to keep plowing money there, even amid tensions between the two nations.
“There is nothing obvious that would stop us continuing to put more money over time to work in China,” James Blair, investment director for Asia-Pacific fixed income at Capital Group, said in an interview in Sydney. “We like the China story. We will continue to add assets to the China domestic market.”
That makes Capital Group, which oversees more than $1.8 trillion, part of the record inflow into China’s local bond market, which Beijing has increasingly opened up to lure foreign investors and balance pressures on the yuan. It also cuts against rising concerns about any financial decoupling between the world’s two largest economies.
Former U.S. Treasury Secretary Henry Paulson last week blasted the “delusions of decoupling,” speaking at the Bloomberg New Economy Forum in Beijing. He warned politicians and bureaucrats against telling “private American players how to deploy private capital for private ends.”
Even so, escalating tensions between the U.S. and China have seen diminished demand for China’s sovereign dollar bonds. Allocations to offshore U.S. investors were in the single-digit percentage range in this week’s record issuance, a similar performance to 2018 and a marked contrast to 2017, before the trade war erupted.
Blair declined specific comment on the China dollar bonds. A three-decade veteran in the bond market, he said Capital Group owns Chinese sovereign and policy-bank securities, in addition to a small amount of credit among its $350 billion in fixed-income assets.
China’s bonds offer notable premiums over those of other large economies, and they often move less in lockstep with counterparts such as Treasuries. Ten-year government notes yielded about 3.29% Wednesday, against 1.74% for Treasuries, negative 0.13% for Japanese bonds and -0.38% on German bunds.
Attractive Yields
“In a low yield world, for a high credit-grade country, there are pretty attractive yields” in China, Blair said. “Also, something that is a bit rare in the bond space, it’s not that correlated with the rest of the bond world. We always like to have some diversifiers.”
Blair also likes other local-currency emerging-market debt, including Malaysia’s and Thailand’s. Capital Group has favored India, where the central bank has done “the right things for investors in the debt,” he said.
Heading into next year, global economic growth should remain anemic despite a small pickup in data, and investors should keep a strong tilt toward places that can hand them income, Blair said.
“We’ve pushed out recession risk and if it’s lower for longer, people are thinking where do you find pockets of yield where you’ve got reasonable liquidity and valuations are on you side?” Blair said in the interview earlier this week. “Emerging-market debt is one of the few places where that pops its head above the parapet.”
And if any uptick in U.S. inflation did emerge, an attractive way to take advantage of that in the U.S. would be Treasury inflation-protected securities, he said.
To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar
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