Officials within the foreign-exchange arm of China’s central bank recently met with Australian regional governments to discuss buying their bonds, people familiar with the matter said.
The securities – known as semi-government – are issued by state debt offices in Australia to help fund infrastructure and public-spending programmes. The officials from the State Administration of Foreign Exchange, or SAFE, which oversees the allocation of $3.2 trillion of reserves for the People’s Bank of China, met with funding agencies in New South Wales and Victoria state in May, said the people who asked not to be identified.
“They are actively interested in the semis market,” said one of the people with direct knowledge of the visit.
SAFE didn’t immediately respond to a request for comment.
SAFE is increasingly looking for higher returns on its reserves amid sluggish growth funds held in low-yielding assets such as US government bonds. The Wall Street Journal recently reported that SAFE has committed $500 million to a real-estate fund managed by Blackstone Group LP in search of the better returns. government bonds, cash and other liquid assets still make up for the bulk of SAFE’s reserves.
Australian 10-year state bonds yield around 4.0 percent, compared with 1.51 percent for US government 10-year Treasury’s and 3.11 percent for sovereign Australian notes.
New South Wales, Victoria and Western Australia states are all rated triple-A by the major ratings firms, while Queensland lost the top rating in 2009 and South Australia was recently downgraded by Standard & Poor’s. Around 233 billion Australian dollars (US$245 billion) of central government securities are on issue, compared with around A$218 billion for the country’s states.
But foreign demand for state debt has lagged behind that of its federal counterpart, where offshore holdings have soared in recent years to hit a record 80 percent. By contrast, only around 45 percent of state bonds are held offshore.
Traders say SAFE is already buying Australian dollar-denominated Kangaroo bonds issued by offshore supranational borrowers. Borrowers such as the African Development Bank, the Nordic Investment Bank and Canadian Province of Manitoba are among issuers to have recently offered Aussie dollar paper.
The Chinese reserves manager, the world’s largest, has for a long time, say traders, been an active buyer of debt issued by the Australian federal government, and its move toward the investment-grade sub-sovereign asset class in Australia reflects a growing hunt for yield amid a declining pool of top rated borrowers.
“They are closer to that investment decision than they have been and you can imagine what that means when it occurs,” said another person familiar with the matter.
China’s growing interest in Australia semi-government bonds comes as the nation’s investment in the country attracts growing political scrutiny. Opposition leader Tony Abbott caused a political row last week when he described Chinese investment in Australia as being “complicated”.
In the fiscal year ending 2011, China was the third-largest source of inbound investment into Australia, behind the UK and US, the two biggest foreign buyers, according to Australia’s Foreign Investment Review Board.
SAFE has expressed interest in Australian state bonds previously but China hasn’t been active in the semis market since at least around the onset of the global financial crisis, said one of the people with knowledge of Safe’s interest.
A full public register on foreign holdings isn’t available.
The move by SAFE would be another sign of the growing financial links between Australia and its biggest trading partner China. Officials from both countries are currently negotiating whether the Aussie dollar can become the third currency directly convertible into the yuan.
Beijing’s interest in state debt fits with a growing theme of interest from Asia-based central banks and sovereign-wealth funds, a process that can take time as investors seek mandate changes and permission to buy.
Already, investors from South America to Russia are piling into Australia’s federal bonds, a trend that accelerated sharply in 2011 as Europe’s crisis deepened. Some of that demand reflects diversification but some is also a rebalancing of growing reserves.
Analysts say the move away from US dollar has slowed in recent months, but still strong buying of Australia’s bonds is a reason the Australian dollar continues to trade around historic highs. -By Enda Curran