Tokyo fund buys China bonds for first time on Japanification bet

THE deflation-fuelled outperformance of Chinese bonds has lured in a Tokyo-based investor for the first time.

A team that oversees investment in foreign government bonds at Asset Management One started buying China’s debt in October and has since boosted exposure to the country’s interest-rate risk, Hikaru Tanaka, fund manager at the Tokyo-based company, said in an interview on Friday (Feb 21).

China’s economic struggles involving excessive debt and real estate “are what Japan experienced in the 1990s,” Tanaka said. “Our long-term view is that it’s inevitable for China to follow the path of Japan.”

China’s government bonds handed investors a return of more than 9 per cent in 2024 excluding currency fluctuations, outperforming their peers, as a sluggish economy dragged down yields. Bets on a deflationary spiral in China threaten to prolong this trend despite measures taken by the authorities to damp overly bearish wagers on the economy.

The growing weight of Chinese bonds on the FTSE Russell’s World Government Bond Index prompted Tanaka to initially start buying the debt before he ramped up purchases on growth concern. “It got harder not to own them at all,” he said.

Tanaka is not alone. Japanese investors are estimated to have increased holdings of Chinese bonds by 53 per cent last year, the most among the markets that make up the World Government Bond Index, according to Bloomberg analysis of Japanese balance-of-payments data.

Such wagers may have paid off in 2024, as the yield on China’s 30-year government bonds fell below its Japanese equivalent for the first time in about two decades. Though Chinese yields have risen in recent weeks, due to delays in interest-rate cuts by the nation’s central bank and a tech-led rally in stocks, 30-year yields remain about 50 basis points (bps) below those in Japan.

Tanaka said his portfolio has longer durations than the benchmark to benefit from a decline in yields, but the allocation to Chinese debt is smaller than the benchmark as he expects authorities to be wary of interest-rate cuts to shield the yuan from a sharp depreciation.

“I see bull-flattening pressure building on the curve” because of the economic prospects, he said, referring to a sharper drop in long-end yields compared with the short end.

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He expects the 10-year yield to fall below 1.5 per cent by the year-end, which is about 20 bps below current levels. BLOOMBERG