Bank of China’s Hong Kong arm is to try and get more retail and institutional investors to lend money to the World Bank, giving them a way to bet on Chinese growth through a new debt fund.
The tie-up between the two institutions underscores how far China has travelled from being a big borrower from the World Bank to becoming its third-largest shareholder and having a pool of offshore retail wealth to invest in the bank’s debt.
The fund will invest most of its cash in triple-A rated bonds issued by the World Bank, but these bonds will be in the currencies of emerging markets that are big trading partners of China, or countries that are major energy exporters to China.
These could include Brazil, India, Malaysia, Russia Thailand and Turkey as well as Australia, Norway or countries from the Middle East.
The World Bank expects to issue between $25bn and $35bn in new debt annually from this year, but almost two-thirds of that has historically been in US dollars.
Klaus Rohland, country director for China, Mongolia and Korea at the World Bank, said Bank of China was the right sort of partner to help it widen its sources of funding. “We are working to broaden our funding base for the World Bank with an eye on smaller scale retail investors,” he said.
The gamble for investors is on the currency conversion risk as they bet that China’s domestic economy expands and continues to suck in imports, strengthening its trading partners and their currencies.
At the same time investors should also get a higher yield than they would from other triple-A rated issuers, and without the credit risk of investing directly in higher emerging market debt or that of commodity-driven economies.
As an illustration, three-year World Bank bonds in Australian dollars yield 3.4 per cent, four-year bonds in Brazilian Reals yield 6.7 per cent and five-year bonds in Norwegian krone yield 2.3 per cent.
For Bank of China’s Hong Kong arm, the fund is an addition to the small handful of products run by its nascent asset management business, which it is trying to build to attract more wealthy clients.
BOCHK Asset Management was given a licence by the local regulator in December 2010 and has since launched three privately placed funds with institutional investors.
Au King Lun, chief executive of BOCHK Asset Management, said 85 per cent of the fund’s investments would go into World Bank debt issued in various currencies, while the remaining money would be used for liquidity needs and would be invested in US Treasuries and offshore renminbi bonds.
“We mainly want to target investments in those currencies that will benefit most from growth in China’s domestic consumption, particularly in oil and other energy exporting countries,” he said. “We also want to pick those without a current account deficit.”
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