Chinese Bonds Get No Mention in $1 Trillion Fund's New Strategy

  • Norges Bank proposes limiting currencies in benchmark index
  • Treasuries are the sovereign fund’s main liquidity source

Norges Bank Investment Management proposed last week to limit its benchmark index for bond holdings to just three currencies -- dollar, euro and sterling.

Photographer: Akos Stiller/Bloomberg

China’s bond market may be the world’s third largest, but when it comes to luring foreign investors, Beijing has a long road ahead.

Norges Bank Investment Management, steward of the world’s largest sovereign wealth fund, proposed last week to limit its benchmark index for bond holdings to just three currencies -- dollar, euro and sterling. The role of its debt investments is to reduce volatility in overall returns, ensure liquidity and offer exposure to risk premiums -- but “not all bonds play these roles effectively,” the bank said.

“The currencies on the list must be liquid and investable for the fund,” the Norges Bank unit said in its proposal, which needs government approval. While emerging-market securities weren’t ruled out, the changes to the fund’s benchmark would mean that even when China’s near-$10 trillion market wins inclusion in global bond measures, the Norway fund won’t be compelled to buy.

Asked about prospects for Chinese bonds under the new proposals, Marthe Skaar, a spokeswoman, said the fund might still "invest in currencies and segments that we propose to remove from the index if such investments supports the role of fixed income in the fund, meaning dampens fund volatility, provide liquidity or provide exposure to risk premia unique for the fixed income market." She declined to comment on China specifically.

As China moves to break down barriers to investing in its onshore market, the slice owned by global money managers remains small. Efforts to boost the foreign share of the market from less than 2 percent include the July start of a Bond Connect that allows investors to buy Chinese debt in Hong Kong.

The $995 billion Norway fund had invested $2.9 billion in debt from Chinese issuers as of last year, according to its website, which doesn’t specify the currency of the securities. The yuan doesn’t feature in the 23 currencies that form part of the fund’s current fixed-income benchmark, which is compiled by Bloomberg LP, the parent of Bloomberg News.

The Norwegian fund’s proposals also underlined how U.S. Treasuries remain the top dog: those bonds “are currently the primary source of liquidity in the management of the fund.”

— With assistance by Jonas O Bergman

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