Photographer: Johannes Eisele/AFP via Getty Images

BlackRock Says 'Absolutely Critical' to Look at China Bonds

  • Index inclusion to drive flows into China onshore bonds: Seth
  • BlackRock long on yuan, along with rupee and rupiah for carry

BlackRock Inc., the world’s largest money manager, said that investors cannot ignore China’s onshore bond market, which has reached the $10 trillion mark.

“It’s absolutely critical if you’re a fixed-income investor to have a closer look at the Chinese bond market and then figure out the access as well as the positioning,” Neeraj Seth, head of Asian credit at the asset manager, said at a briefing on Wednesday.

Foreign investors own only about 3 percent of China onshore notes, a significantly lower proportion than in other markets. The country’s regulators have been opening the world’s third-largest bond market to foreign investors. Trading on China’s new bond link to the rest of the world started this month and the People’s Bank of China opened interbank bond trading to most types of investors last year.

However, the process of raising foreign participation in onshore bonds will be gradual and China’s notes need to be included in major indexes to drive flows, said Seth.

Citigroup Index LLC said in March that Chinese onshore sovereign bonds are set to join some of its gauges but omitted them from its key World Government Bond Index. Bloomberg Barclays Indexes, owned by Bloomberg, overhauled its China fixed-income gauges and started a Global Aggregate + China index in March, while stopping short of adding the nation to major benchmark indexes.

Inclusion in the major indexes will likely be in a 12 to 18 month horizon, according to Seth.

BlackRock is long on the Chinese yuan, which has advanced 2.8 percent against the dollar this year. Seth said in an interview in March that BlackRock had a “small long” position in the yuan, as they added positions in January when the market was bearish.

The firm is also long on the Indonesian rupiah and the Indian rupee. Within the Chinese onshore bond market, the firm likes higher-quality government bonds and policy banks as well as quasi sovereign names but is cautious on selective credits based on valuations, Seth said at the briefing Wednesday.

— With assistance by Lilian Karunungan

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