Pension funds plan move on China's big sovereign bond market

China's $16 trillion sovereign debt market is looking alluring for European pension funds as aging populations stretch their finances

China's $16 trillion sovereign debt market is becoming too big to ignore, even for the most risk-averse Western investors.

A large, A+ rated market that pays 3% yields, with minimal volatility. It's looking increasingly alluring for European pension funds in sub-zero bond yields as aging populations stretch their finances.

For some, the benefits are beginning to outweigh the political risks, and they are upping allocations to China, or considering doing so, according to Reuters' interviews with half a dozen firms that advise and manage money for pension funds.

Not all our clients invest in China's bond market, but they are all looking into it, said Sandor Steverink, head of Treasuries at APG, which manages a third of the assets of the 1.5-trillion-euro ($1.8 trillion) Dutch pension industry.

Dutch 10-year bond yields are languishing at around -0.4%, spelling losses for any investor who holds them to maturity, a picture reflected across Europe.

Such fund interest is a boon for Beijing, which is seeking to internationalize its financial markets and lure big-ticket overseas investors as its once-mighty trade surpluses dwindle. Europe's pension industry alone is worth $4 trillion.

China's sovereign debt market is the world's second-largest after the United States. Yet while foreigners own a third of the U.S. Treasury market, they hold just 9.7% of China's sovereign debt, according to government data.

Western pension funds make up a tiny cohort of the foreign investors in yuan bond markets, but their presence is growing.

Of the $9.5 trillion of assets under management from corporate and public pension funds globally, 0.26% was held in Chinese bonds as of the third quarter of 2020, up from 0.04% in 2015, according to data from institutional asset managers shared with financial data provider eVestment.