Sovereign wealth funds hunt for bonds on Chinese mainland

LONDON, Aug 10 (Reuters) - Sovereign wealth funds are

increasingly interested in buying China's domestic bonds to get

a bigger foot in the world's second largest economy, benefit

from good yields and diversify their exposure to more

currencies.

Despite concerns over China's slowing growth, the giant

industry, which manages countries' windfall revenues for future

generations, is taking advantage of the gradual opening up to

foreign investors of its mainland bond market worth over $3

trillion.

Norway's sovereign wealth fund said on Friday it had

increased its exposure to Chinese government bonds, had already

reached the ceiling of its quota for onshore Chinese assets and

was seeking to increase it.

"The onshore Chinese market is bigger than the (German) bund

market, bigger than the (UK) gilt market and these guys have

hardly any exposure to onshore renminbi," said Gary Smith,

global head of official institutions at BNP Paribas Investment

Partners. It "is something they are very very keen to be

involved with."

The domestic, so-called "onshore" market is a

highly-regulated market for yuan-denominated sovereign and

corporate bonds providing limited access for foreigners, with

only a restricted number of overseas institutional investors

allowed to buy. It offers a much bigger pool of assets than

bonds traded freely outside of mainland China in the so-called

"offshore" market.

Sovereign wealth funds, whose assets are estimated at $3-4

trillion, are increasing their exposure to emerging markets in

their hunt for better returns in the midst of the euro zone's

debt crisis and slowing global growth.

They can buy into China's domestic bond and equities market

through its Qualified Foreign Institutional Investor (QFII)

system of licenses and quotas, which Beijing loosened on July 27

when it published new rules that allow investment in the

interbank market, where most bonds trade.

This follows moves to grant more licences and increase the

quota for the overall QFII programme from $30 billion to $80

billion earlier in the year, and comes after China began

allowing foreign central banks in 2010 to directly invest in its

domestic interbank bond market, outside the QFII system.

"Sovereigns in general are underexposed to Chinese assets

and given the flat equities in China and decent yields you can

get on bonds they are diversifying into that," said Andrew

Economos, head of sovereign and institutional strategy for Asia

at JP Morgan Asset Management.

Chinese bonds offer yields from 4 percent to double-digits

depending on the quality, with sovereigns more interested in the

lower-yielding, higher quality ones, he said.

"We have seen more and more sovereign fund requesting quotas

and increasingly they are receiving licenses," he said. "It has

been occurring, rather selectively but with increased

frequency."

Asian sovereigns understand the Chinese opportunity better

and have shown more interest, with European and Middle Eastern

ones following now, Economos said.

JPMorgan Asset Management is, together with BNP Paribas,

among the 172 financial institutions which had a licence to buy

Chinese securities through the QFII system as of end June.

DIVERSIFICATION

Some of the world's largest sovereign wealth funds, Abu

Dhabi's Investment Authority and Singapore's GIC have such

licences to buy Chinese bonds themselves without going through

asset managers.

Qatar has applied for a $5 billion quota in the QFII scheme,

the official China Securities Journal reported in June.

Among central banks, Bank Indonesia has started investing in

China's interbank bond market and on July 1 the official Xinhua

news agency reported that Korea had begun making purchases.

Neither have said how much they were buying.

"We do have a lot more interest from other central banks and

sovereign wealth funds," said Becky Liu, Hong-Kong based HSBC

Asian fixed income strategist, adding that she could not mention

names for confidentiality reasons.

"The domestic market has been opening up much faster this

year, and has therefore attracted much more interest from

foreign investors," said Liu, adding that on top of direct

purchase by central banks, "some countries prefer to buy from

the sovereign wealth funds."

China's main bond clearinghouse publishes a data series

widely considered to be a proxy for foreign holdings of Chinese

interbank bonds. That figure stood at 96 billion yuan ($15

billion) at the end of June, up from 87 billion yuan at the end

of 2011, out of a total of 22 trillion yuan of outstanding bonds

in China's interbank market.

Source: http://news.yahoo.com/sovereign-wealth-funds-hunt-bonds-chinese-mainland-145716419--sector.html

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