Better Late Than Never Is OK in China

There's plenty in favor of a rally continuing.

Planning to park a couple of billion dollars in bonds whose yields have tumbled to a record low hardly seems a smart move. Yet, that's what South Korea's National Pension Service is proposing. There may be method in the madness.

The Seoul-based retirement fund will invest 2.4 trillion won ($2.2 billion) in offshore bonds by 2017 to take total holdings of such assets to 24.3 trillion won, according to a five-year fund outline approved in May. Stocks and alternative assets are also on the shopping list, and there's a focus on Indian and Chinese government debt, Chief Investment Officer Kang Myoun Wook said.

Chinese government bond yields are at unprecedented lows after an almost three-year rally. Ignoring currency fluctuations, someone who bought 10-year, 4.42 percent notes issued in March 2014 would be sitting on a 25.4 percent return. Taking the yuan's 6 percent depreciation over that period into account still gives a healthy close-to-20-percent payout. Not bad in a world where negative rates are fast becoming the norm.

Panda-Sized Returns

Chinese government bond yields are at record lows

Source: Bloomberg

It raises the question of whether the National Pension Service has missed the boat. Maybe not, because it seems there's plenty in favor of a rally continuing.

Ten-year debt from the world's second-largest economy still yields 50 basis points more than government debt in Chile, which also has an AA- score from S&P. China's GDP, however, was $11 trillion last year, about 46 times the size of Chile's. Its economy is expanding at 6.7 percent, more than three times faster than the South American nation.

And for all the headlines about yuan devaluation, actually the Chinese currency is quite predictable.


In spite of the yuan's unexpected devaluation in August last year, China's currency remains one of the least volatile among emerging markets

Source: Bloomberg

That's key because getting an 11.8 percent yield on a 10-year Brazilian government bond or 7.1 percent on an Indian rupee equivalent doesn't matter a jot if you risk incurring double-digit losses from currency devaluation. The Chilean peso, meanwhile, has declined 11.5 percent against the dollar over the past 24 months. So, even at 2.6 percent, Chinese notes hold appeal.

As Korea's retirement fund probably realized, with Chinese government debt, it's better late than never.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Christopher Langner in Singapore at

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