Michael Hasenstab, a senior vice president who oversees more than $150 billion of global fixed- income assets at Franklin Templeton Investments, said he would prefer to gain exposure to China indirectly though Korean, Singaporean and Malaysian bonds until Asia’s largest economy opens up its capital account.
“If China moves to liberalize its interest-rate policy, interest rates in China are going to go higher. Those Dim Sum bonds are tied to Chinese yuan and interest rates so there’s duration risk in renminbi offshore bonds. One needs to be selective about yuan purchases.
“We have an Asian Bond Fund (TEMASAA) but only a handful of renminbi-denominated bonds. They tend to be very short duration and they tend to be very high-quality issues. We’re not taking a lot of credit risk and we’re not taking a lot of interest-rate risk, or renminbi currency risk. We don’t have any direct holdings off onshore assets because that’s restricted.
“All of Asia has a tremendous indirect exposure, whether it’s macroeconomic exposure, or simple currency correlation. If China moves down this path of solid, be it double-digit or 7 percent growth, that gives a boost to Asian exporters. If the currency gradually appreciates, that’s going to pull the rest of Asia along with it.
“Korea, Malaysia and Singapore are structurally very tied to the China growth engine,” Hasenstab said. Investing in their bonds “is the only meaningful exposure until China opens its capital account and allows direct investment,” he said.
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