Japan's GPIF won't buy China's sovereign debt

Japan's Government Pension Investment Fund, the world's largest pension fund, said it won't include yuan-denominated Chinese sovereign debt in its portfolio.

The decision comes as FTSE Russell is set to start adding Chinese debt to its benchmark global bond index, which the GPIF follows, starting in October. The pension fund will instead use a version of the World Government Bond index that excludes Chinese government bonds, Hiroshi Nagaoka, an official at the pension fund, told Bloomberg News.

Minutes from a July meeting of the pension fund's board of governors released Wednesday showed that the members were in favor of avoiding Chinese bonds, citing issues surrounding settlement, liquidity and stability. The management board made a final decision on Sept. 22, Mr. Nagaoka said.

The decision comes amid a steady deterioration in the China-Japan relationship. And it was not related to the issues surrounding China Evergrande Group, Mr. Nagaoka added.

"Investors have been forced to rethink the risks of investing in Chinese assets," said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. He cited U.S.-China tensions and recent government curbs on the private sector, as well as Evergrande.

The GPIF held a total of ¥9.7 billion ($88 million) in stocks and bonds related to China Evergrande as of the end of March, records show. The fund had a total of ¥191.6 trillion in assets as of the end of June, including ¥47.8 trillion in foreign debt. The pension fund does not invest in any yuan-dominated Chinese bonds now, but have three euro-dominated Chinese sovereign notes in its portfolio as of the end of March, Mr. Nagaoka said.

GPIF President Masataka Miyazono said in July that the pension fund needed to be cautious in deciding whether to invest in Chinese debt.

"Given strained relations between Japan and China in recent quarters, it is not surprising at all that they are not including" Chinese bonds, said Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong. Implications for Chinese debt were likely to be "very small," she added.

Investing public pension money in Chinese government debt would likely be a politically unpopular decision in Japan, considering the historically tense relations between the two countries. The issue would have "political implications," Eiji Hirano, the former chairman of GPIF's board, said in June.

However, the fund may struggle to meet its benchmark returns without high-yielding Chinese debt. The decision will also likely impact other Japanese public and private pension funds, which have been considering whether to invest in Chinese government debt.

One smaller pension operator that mimics the GPIF's portfolio said in July it would consider investing further in Chinese debt when included in the WGBI.