The pension fund's willingness to maintain its China weighting is down in large part to its willingness to see how its current strategic investments in the country pan out. This suggests its China exposure to be 3% to 4% of its equity portfolio, given that China's weighing in the MSCI index was almost 40% of February. Yet despite this, APG is content to stick with an emerging market exposure that stood at 7% to 10% of its portfolio at the end of last year.ĪPG declined to break out its specific China exposure, but it uses the MSCI Emerging Market Index as its emerging markets benchmark. Some central banks, monetary authorities and sovereign wealth funds are also permitted to use the China Interbank Market Direct scheme.ĪPG is generally more cautious when it comes to China equities, albeit from having a much larger exposure.Ījay Cherian, head of global emerging market equities believes China equities (including A-shares, H-shares and American Depositary Receipts) offer a one-of-a-kind attractiveness given the large size and diversity of its market for new investors. International investors can access China's exchange and interbank bond markets via the Qualified Foreign Institutional Investor and RQFII schemes, and invest in its interbank market through Bond Connect. Though we do expect there will be more relaxation on derivatives market in the country, which could give us more hedging tools and be able to manage the portfolio more efficiently,” Suen said. “China has been opening the fixed income market for past few years and everything is moving in the right direction. He added that China is generally on the right track when it comes to gradually opening its capital markets to more foreign investment. “Also, the correlation of China between other markets is quite low which provides some diversification for the portfolio.” “Global low yield environment provides China’s fixed income market a better position given the yield advantage,” said Suen. In addition, APG considers an increase in defaults appears to be an acceptable risk given the overall yields on offer versus the minimal coupon rates and yields on offer in other large markets. “Defaults are part of a healthy capital market in fact, and we are not too concerned about that.” Indeed, he argued that the default rate is relative lower than some of the markets, and not necessarily a bad thing. Suen noted that APG was not too surprised about an increase in defaults, given the stresses of the Covid-19 outbreak and the trade tensions with the US.
The market’s allure remains strong for Suen even after defaults in the country have risen to unusually high levels in recent months. Missed repayments of principal and interest by onshore China companies hit Rmb25.9 billion ($4 billion) at the end of February, almost twice than previous year total amount, according to Bloomberg data.
Wim Hazeleger, Asia Pacific chief executive at APG, told AsianInvestor in December that the group had expanded Asia real estate team and China fixed income team with 10 new appointments.
The pension fund has prioritised adding fixed income and property assets in the world’s second-largest economy. The pension fund had between 7% and 10% of its equity investment portfolio in emerging markets as a whole at the end of 2020. Suen declined to reveal APG’s exact exposure to China fixed income, beyond noting that it is currently quite small. We don’t have a planned figure so far but we do plan on expanding given the attractiveness of the market,” he said.
“Compared with China equity, investing into the fixed income assets in the country for foreign investors is fresher. Gregory Suen, head of China fixed income at the €570 billion ($678 billion) pension fund giant, told AsianInvestor that China’s bond market offers a unique opportunity for aspiring foreign investors, noting that it is “very rare, or never happens, that a new market has such size and depth”.
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