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China cash to hang around in bonds

Chinese investment cash flowing through the rest of Asia, Australia and New Zealand is not about to dry up, according to Arthur Lau, Managing Director at Pinebridge Investments, despite debate over how long the growth can be maintained.

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Speaking on a panel at ANZ’s 2018 Debt Conference, Lau said the levels of Chinese money coming into regions like Australia would continue.

"We do not think [China’s offshore investment] money is going back onshore any time soon.” - Arthur Lau

“We do not think this money is going back onshore any time soon,” he said. “[Chinese groups] need to continue to reinvest and recycle. I think Australia is clearly one big element that helps them fill the gap.”

Lau acknowledged the market debate over whether Chinese money would stay but said any reduction in new money coming offshore wouldn’t affect funds already in the system.

“My view is, as the Chinese continue to deleverage, we may not see a significant increase - in terms of onshore money moving offshore - that we have seen in recent years,” he said. “But that doesn’t mean the offshore money will need to go onshore.”

“Whatever money that has already gone offshore is highly likely to stay in the offshore market which will need to be recycled and reinvested in the bond market.”

Tenfold

Growth in Asia-Pacific bond funds has surged more than 50 per cent over the past two years, as rapidly built-up liquidity leaves demand outstripping supply of higher-grade US bonds. Australia and NZ are therefore a natural choice for Asian investors seeking access to developed markets.

Jimmy Choi, Co-Head of Capital Markets at ANZ said 2017 was a banner year for Asian interest in Australian debt markets.

“We’ve been discussing the rise of Asian liquidity over the past three or four years,” he said. “I think we’re at a critical juncture where we want to explore (whether it is) a true alternative funding market for Australia.”

Lau, also Co-Head Emerging Markets & Fixed Income at Pinebridge, told the panel Australia could attract more Asian debt interest with a better-developed structure. Choi agreed.

“Australia bonds are currently all out of index,” he said, referring to the way in which investments in capital markets are grouped together once a certain scale is reached. “There is no index.”

“My view is as you get more critical mass eventually it will be indexed-linked. Someone will have an index.”

“I think from an Asian perspective the level of [interest] will be even higher. If it’s indexed linked it’s much, much easier to buy so it will have way more access and value.”

The insights were delivered on a panel featuring Mirvac Group Treasurer Darren Lake, Sydney Airport Treasurer Michael Momdjian and ANZ Head of Markets Credit Strategy Owen Gallimore.

Shane White is senior production editor at bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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