China's `Asset Famine' Forces Ping An to Swap Bonds for Bridges

  • Alternative investments solution to falling returns: chairman
  • Money managers face record low interest rates, plunging stocks

China’s money managers are seeking out alternate investments as record-low interest rates and the world’s worst stock market performance cause a shortage of high-yielding assets.

Ping An Asset Management Co., the nation’s third-largest investment firm, is planning to put more money into bridges and highways, which Chairman Jack Wan says can generate stable cash flows. Asset managers need to be innovative because clients are demanding higher profits even as returns dwindle, according to Shanghai Yaozhi Asset Management LLP.

“Our alternative investments will certainly increase, as history shows it’s a good solution for other markets that have experienced similar situations of falling investment returns,” Wan said in an interview in Shanghai on Tuesday. “Other strategies, given the asset famine, include increasing investment duration, raising risk preference and boosting overseas allocation.”

China’s benchmark stock index has declined 15 percent so far this year, while six interest rate cuts since November 2014 and a slowing economy have pushed the 10-year government bond yield to the lowest levels since 2009. An increasing number of global investors are boosting exposure to alternative assets as bond yields remain compressed, Jones Lang LaSalle said in its 4Q Investment Outlook report. Of U.S. commercial real-estate buyers last year, 15.4 percent were from offshore, compared with 6.4 percent in 2007, according to the company’s data.

“This is not an easy time for asset managers,” said Wang Ming, chief operations officer at Shanghai Yaozhi, which oversees 4 billion yuan ($617 million) of fixed-income securities.. “Clients are still demanding high returns, but looking around, there are not a lot of investments that can offer good risk-adjusted returns. Asset managers need to develop their own expertise.”

Korea Investment Corp., a sovereign wealth fund with a net asset value of $91.8 billion, plans to increase alternative asset holdings to 20 percent of its portfolio by 2020 from last year’s 12.4 percent, it said in a statement last month. China’s National Social Security Fund, the state-run pension program, will “significantly” raise the proportion of its alternative investments, vice head Wang Zhongmin was cited as saying by the Securities Times in November.

The 10-year sovereign yield in China is 2.84 percent, compared with 1.81 percent in the U.S. and minus 0.09 percent in Japan.

Bond Rally

A Ping An-ChinaBond investment grade total return index climbed 1.1 percent in the first three months of this year to head for the ninth quarterly gain in a row. Haitong Securities Co., ranked the best fixed-income research team by New Fortune Magazine, warned of risks for a correction in the bond market, as inflation climbed to the highest level since mid-2014. The debt rally has also brought the issue of leverage into focus with outstanding repurchase agreements in the interbank market, used by debt investors to amplify their buying power, surging to a record in December.

Ping An Asset Management, a unit of China’s second-largest insurer, oversaw 1.97 trillion yuan at the end of last year, following China Investment Corp. and China Life Insurance Co. Its net income more than doubled to 2.36 billion yuan in 2015, according to a stock-exchange filing.

“For an insurer, debt investment is always the biggest chunk, as our equities holdings are only slightly above 10 percent,” said Ping An Asset President Michael Huang. “One of our advantages is in non-standardized investments, including long-term debt investment projects, which provide us with safety, long duration and fixed cash flows at the same time.”

’Good Choices’

Bonds issued by local government financing vehicles in regions with strong fiscal background, highway builders, top-tier property developers, as well as consumption and medical companies are good choices, said Huang. The asset manager sold debt issued by Shanshui Cement Group Ltd. in June on early signs of shareholder dispute before the company defaulted later in the year.

“We’ve increased the frequency of credit-risk assessment to monthly from once every year initially,” Huang said. “On the other hand, we’ve noticed that companies from industries in deep trouble are not able to issue bonds. We don’t think there will be large-scale credit events to break out.”

— With assistance by Ling Zeng, and Helen Sun

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