The launch last year of China’s Bond Connect program, which links the nation’s $10 trillion bond market to the outside world, offers a new asset class to help grow the region’s asset management industry: Chinese high yield bonds.
That’s according to senior executives of Value Partners, one of Hong Kong’s largest hedge fund firms with $18 billion in assets under management.
“Demand for China’s bonds and credits will continue to rise in the years ahead, especially given how yields there are much higher than in the west,” said Eric Poon, head of sales and managing director at Value Partners, in a recent interview. “This will be the case as China’s bond market grows, and as more central banks add the Renminbi into reserves, and with Bond Connect in place, investors will follow suit.”
Value Partners expects the China Bond Connect will help propel the growth of its $5.3 billion high-yield bond fund, according to the firm’s chief executive Au King Lun.
“The Bond Connect may even surpass the Stock Connect in terms of volume in the future,” Au told Institutional Investor at the firm’s offices in Hong Kong.
The China Foreign Exchange Trade System, which manages the Bond Connect alongside the Hong Kong Exchange, does not disclose the value of the contracts of bonds traded. But according to the website, foreign investors bought and sold 99,760 contracts of the ten most-traded bonds this January, up from 64,421 in January 2017. China’s Stock Connect, which launched three years ago, traded 861 billion yuan ($136.6 billion) in January, more than three times the 277 billion yuan volume in January 2017.
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Value Partners, a value investor known for its bottom-up stock picking, is taking the same approach with its fixed income investments by visiting one company at a time and speaking to its executives. On average, the hedge fund firm’s portfolio managers make 2,500 company visits a year as part of their due diligence process.
“When we talk to management we don’t just take their word for granted,” Au said. “We do independent research.”
The Greater China High Yield Income Fund, for instance, invests in China and Hong Kong corporate bond issues that yield between 7 percent and 9 percent annually. In 2017, the fund gave investors an annualized return of 10.1 percent, with a five-year return of 38.4 percent. Asian corporate bond yields returned 5.8 percent on average in 2017, while high-yield bonds returned an average of 6.9 percent.
Au said Value Partners may soon launch a fund that specializes in Asian and Chinese corporate private debt, plus another fund with a total return strategy. Unlike many investors on Wall Street who fear that rising corporate debt levels in Asia and China will lead to a financial crisis, Au said he does not think the rising debt is a significant cause for concern for global investors – at least not in the foreseeable future.
“China basically has a closed banking system,” he said. “The Chinese government doesn’t have much foreign debt. Most debt was denominated in Renminbi and lent to state-owned enterprises. That is why China can deflate the debt bubble gradually. There is no external pressure on the China government and yet it is cracking down on rising corporate debt levels, and this is a good thing.”