TOKYO — Japan’s Government Pension Investment Fund has decided not to include yuan-denominated Chinese government bonds in its portfolio, Nikkei has learned.
The move came after British index provider FTSE Russell decided to include Chinese government bonds in its benchmark FTSE World Government Bond Index (WGBI) in March. The move by the WGBI will be phased in over a three-year period starting at the end of October.
The GPIF — one of the world’s largest institutional investors — uses the index.
After the debt crisis at property giant China Evergrande Group emerged, the GPIF decided to stop adding Chinese sovereign debt to its portfolio due to the country’s uncertain bond market and other factors.
As of the end of June, the GPIF was managing 193 trillion yen ($1.7 trillion) in assets, 47 trillion yen of which is exposed to foreign bonds. It currently has no exposure to yuan-denominated Chinese government bonds.
Chinese government bonds have a higher yield than their U.S. counterparts but are riskier, and are becoming difficult to sell amid turmoil in global bond markets.
The GPIF manages roughly 20 trillion yen using the WGBI. Markets were keen to see if the GPIF would invest in the index after Chinese government bonds were included in the WGBI.
If the GPIF sticks with the index and invests in Chinese government bonds, bond investments would total about 1 trillion yen. The GPIF appears to have scrutinized the market for Chinese bonds, including the settlement system, and had been discussing internally the possibility of holding off on investments even before the Evergrande crisis.
In Japan, some large insurance companies have started buying Chinese bonds. But Japanese investors are generally less active in the bonds compared with Western investors, who aggressively seek higher yields.
In light of the GPIF’s move, other Japanese institutional investors will likely take a more cautious approach to Chinese bonds.