China Is a No-Go Zone for This $23 Billion Investor

Investing in otherwise-attractive Chinese bonds comes with one big, deal-breaking caveat for Joseph Urciuoli at Spectrum Asset Management Inc. -- the risk of the government stepping in to declare that you just won’t get paid.

Urciuoli, head of research at Spectrum, which had $23 billion under management as of September, says he’s been impressed by China Construction Bank after meeting with its representatives a few times the past couple years. It’s “a very, very good bank,” he says. But deeper concerns about putting money in Chinese assets stopped him from going in.

“The thing with China is, it’s a black box,” Urciuoli said in an interview in Hong Kong on Monday. “We don’t know how the accounting is, we don’t even know if the GDP numbers are real. Even if the numbers are real, it’s not a free country.” And in countries that aren’t free, “their leaders can say ‘you know what, we are not gonna pay U.S. investors,’” he said.

While Urciuoli was referring to dollar bonds, a bigger question in some China watchers’ minds is the foreign appetite for the country’s domestic debt, where capital-control concerns come into bigger play. While foreign holdings have been rising since a Bond Connect with Hong Kong was set up, they are still relatively small, at less than 2 percent of the $11 trillion market -- the world’s third largest -- as of February.

The country also has a recent record of diplomatic disputes leading to economic consequences that’s spurred investor worries. South Korean tourist-industry companies were hit last year when Chinese package-tour operators curtailed visits amid a political spat.

Chinese bonds present "extraordinary risks that we don’t really need to do -- political risks,” Urciuoli said. He had been considering China Construction Bank’s subordinated bonds, which have been popular thanks to yield premiums, though have weakened more recently. He said in Asia, he’d rather stick with securities from Japan, South Korea and Hong Kong.

Urciuoli noted that Spectrum has seen the consequence of politics in the past. It exited Banco do Brasil SA bonds amid Brazil’s deepening, corruption-triggered crisis, which has seen politicians charged with crimes. Spectrum also cut holdings of National Bank of Greece securities as that nation struggled with its debt crisis. Greek bank bonds dropped to record lows in 2015 when strict capital controls were imposed.