Photographer: Christine Balderas/Getty Images

Chinese Investors Are in Love With U.S. Dollar Debt

  • The size of China’s QDII bond funds quadrupled this year
  • HFT Investment to raise money for new QDII bond fund soon

Terence Cheng, a fixed-income fund manager based in Hong Kong, has never gotten so many Chinese client inquiries for overseas dollar bonds. Their questions sent over WeChat, the popular Chinese instant-messaging service, even interrupted his beach vacation in Thailand.

“I spent one to two hours on conference calls with mainland clients on WeChat almost every day,” said Cheng, the chief investment officer at HuaAn Asset Management (Hong Kong) Ltd. He was similarly busy working at home when Typhoon Haima shut businesses across the city last month. “Domestic investors’ demand for offshore dollar bonds is really strong.”

The yuan has dropped 4 percent this year against the dollar, the most in Asia, and the prospect of further depreciation has driven Chinese investors to buy assets denominated in the U.S. currency. The size of Chinese funds that invest in bonds overseas through the nation’s Qualified Domestic Institutional Investors program more than quadrupled this year to 17.4 billion yuan ($2.6 billion) as of Sept. 30, according to research firm Z-Ben Advisors.

One fund tapping the surging demand is Shanghai-based HFT Investment Management Co. It will start selling shares of its dollar bond fund soon, according to Chen Yiping, head of the firm’s fixed-income fund department, who forecast the yuan may decline 2 to 3 percent in the coming year.

“Chinese investors want to either make profits from yuan depreciation or to diversify investment channels,” he said.

China-based investors bought a net $1.69 billion of U.S. company debt in August, the highest monthly purchase in half a decade. Investors in the world’s most populous nation utilized a record 90 percent of the quota allotted for overseas investment, up from 67 percent in 2015, according to Z-Ben in August.

“Fast economic growth in the past few years has led to an increase in the number of wealthy Chinese,” said Bai Haifeng, head of international business at China Merchants Fund Management Co. “Yuan depreciation will increase these people’s demand for dollar assets.”

While the flow of cash from China is boosting all dollar debt, the benefit for Chinese companies issuing such notes has stood out, as investors from the Asian nation often prefer buying securities from companies with which they are familiar. Chinese firms sold $32 billion of notes in the offshore market in the third quarter, the most in more than a year. The yields on such bonds have dropped near record lows around 4.07 percent.

“The funds from China will protect Chinese names from the impact of any Fed rate hike in December,” said HFT’s Chen. The fund may also consider U.S. Treasuries because yields are attractive, he said.

The State Administration of Foreign Exchange has stopped approving new QDII quotas since March 2015. Some bond funds no longer accepted share purchases because they are near the limit of their quotas.

“Given the prospect of yuan deprecation, the regulators have strengthened controls on capital outflows, including overseas investments by Chinese investors through mutual funds or banks,” said Liu Dongliang, a senior analyst at China Merchants Bank Co., who forecasts the yuan will weaken 4 percent next year. “It’s hard for Chinese funds to go overseas.”

Offerings of new QDII funds are hot. Manulife Teda Fund Management Co. sold out shares for its 700 million yuan dollar bond fund on the first day last month. China Asset Management Co., the nation’s third-biggest fund company, also completed raising money for its new overseas note fund in one day in July.

“The size of Chinese QDII bond funds will grow even though SAFE may not approve new quotas in the short term,” said Shichen Liu, an analyst at Z-Ben. “Chinese mutual funds will try to use up the existing QDII quotas to set up new funds or allocate more quotas to old funds, given yuan currency volatility drives up the demand.”

— With assistance by Judy Chen, Lianting Tu, and Harvard Zhang

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