U.K. Money Manager Starts New Fund to Buy Yuan Bonds in China

Stephen Jen, known in investing circles for his “dollar smile” approach to evaluating the greenback, has stepped up his bet on the Chinese currency that’s trying to unseat its U.S. rival in global finance.

Jen’s London-based asset manager Eurizon SLJ Capital on Tuesday announced a new bond fund focused on yuan-denominated assets, while another product will buy local-currency debt from emerging-market nations. Eurizon SLJ is part of Intesa Sanpaolo SpA’s asset management division, which manages about 350 billion euros ($425 billion) across 25 countries, according to its website.

The launch comes at a time when yield-seeking investors turn their attention to China’s outperforming economy. Foreign funds are pumping in record cash, adding to their bond holdings at the fastest pace on record in January. And no wonder -- the yield gap between 10-year China and U.S. sovereign notes in December reached the widest ever in data going back to 2005.

U.K. Money Manager Starts New Fund to Buy Yuan Bonds in China

Part of the appeal of yuan-denominated assets, Jen said, is that China is increasingly being viewed as a haven in times of turmoil -- a role that has long been filled by the dollar and other assets.

“In risk-off episodes in the past 20 years, Chinese bonds have reliably rallied,” Jen wrote in an email. There are “very few safe-haven assets that carry any meaningful yield. If we look around the world, all yields have collapsed, making the 3.0-3.5% annual return on sovereign debt in China that much more interesting.”

Jen developed the dollar-smile framework in the early 2000s, based around the idea that the greenback tends to appreciate in two scenarios: when crises fuel demand for havens, and when U.S. growth outperforms the rest of the world. While Jen is by no means now abandoning the U.S. currency, his latest move does reflect the yuan’s growing prominence among investors as the country opens up its markets to foreigners.

The yuan was little changed at 6.4616 per dollar around noon in Shanghai Wednesday.

Higher Yields

The rising interest in Chinese bonds are twofold: the 10-year government securities offer yields of 3.25%, compared with U.S. equivalents of 1.35% and German bunds at -0.32%. In addition, the assets add diversification to the portfolios of global investors. Foreigners currently hold about 2 trillion yuan of onshore government bonds, or about 4% of the amount outstanding.

Still, investors must surmount obstacles to invest in China’s bonds, including strict capital controls. Curbs were tightened at the end of 2016 as a plunging yuan and stock market triggered outflows. Such restrictions are concerning to some funds as the curbs could make it harder for them to repatriate cash overseas. In recent months, however, there are signs that officials are starting to ease controls.

Foreign investors bought more than 1 trillion yuan of Chinese bonds in the interbank market last year, the fastest pace on record. Apart from a strong yuan and economic recovery, the inflows were also driven by global index compilers including yuan debt into their major gauges.

The long-only Eurizon SLJ Bond Aggregate RMB Fund will be managed by Jen and Monica Wang, and will invest in a diversified set of renminbi-denominated debt traded on the China Interbank Bond Market or in other regulated markets in China and Hong Kong. The Eurizon SLJ Local Emerging Markets Debt Fund will be managed by Yasmine Ravai and Alan Wilson, and will invest in sovereign, credit and derivative bonds issued in local currencies in the 19 emerging markets that make up the JPMorgan GBI EM Global Diversified Index.

Both funds will be registered in the U.K.

“Given the demographic trend and the need for European/British savers to earn a meaningful risk-adjusted return on their savings, there will continue to be significant demand from this part of the world for higher-yielding investments elsewhere,” Jen said.

©2021 Bloomberg L.P.

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