China's $9 Trillion Bond Market Lures Neuberger, Fidelity

  • Neuberger says it may launch a private fund with focus on bond
  • Foreign investors’ onshore bond holdings grew in April

A bond slump in China hasn’t damped top global funds’ interest in the $9 trillion market as the government opens the door to greater access.

Neuberger Berman Group LLC, based in New York, is considering launching a private fund with a focus on bonds after Fidelity International became the first global asset management firm to do so in China last week. Foreign investors’ holdings of Chinese onshore notes rose to 772 billion yuan ($112 billion) in April, from 762 billion yuan in March, even as local notes lost the most in four months.

“It’s likely our first fund will be in the fixed-income space” in China, Nick Hoar, Hong Kong-based managing director and head of Asia Pacific at Neuberger Berman, said in an interview Monday. The firm oversaw $267 billion worldwide as of March 31.

China is accelerating the opening of the world’s third-largest debt market to help counter capital outflows and seek inclusion in global bond indexes. Bloomberg Barclays Indexes, owned by Bloomberg, overhauled its China fixed-income gauges and started a Global Aggregate + China index on March 1, while stopping short of adding the nation to major benchmark measures.

Morgan Stanley in the same month said it expects Chinese government debt to become eligible for major bond benchmarks over the next 36 months, after Citigroup Index LLC said that China onshore sovereign notes are set to join some of its gauges.

“Undeniably, the renminbi bond markets are the future of Asia’s bond markets and will play in global financial markets for many years to come,” said Freddy Wong, a fixed income portfolio manager who oversees the private fund at Fidelity, in a press release on Friday. “The size of the onshore market is currently over 65 trillion yuan, and is expected to reach 100 trillion yuan by the year 2020, surpassing that of the Japanese market.”

In June 2016, China allowed foreign asset management firms to set up onshore units to sell bond or stock funds to eligible onshore institutions and rich individuals in private placements. Global funds including Invesco Ltd. and Value Partners Group Ltd. said they are aiming to get regulatory approval to set up private funds in China.

Neuberger Berman will look to hire a head of trading, two portfolio managers and research personnel if the company forges ahead with its plans for a private fund, according to Hoar.

“At a global level, a core market is China for us so there’s no doubt we’d be investing in this market for many years to come,” said Hoar.

Neuberger Berman currently invests in China bonds through its global emerging market debt funds as well as its China onshore strategy which is managed out of Singapore, according to Prashant Singh, senior portfolio manager - emerging markets debt.

Investment grade bonds issued by some Chinese real estate and resource companies are attractive, although the “focus on individuals names is important” during the security selection process, he said.

— With assistance by Judy Chen, and Ruth Liew

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