By Hideyuki Sano and Andrew Galbraith

TOKYO/SHANGHAI (Reuters) – Japan’s Government Pension Investment Fund (GPIF) will not invest in Chinese government bonds due to settlement and liquidity issues, even after they will be included in a major bond index next month, it said on Wednesday.

The world’s largest pension fund, with total assets of 193 trillion yen ($1.729 trillion), said it will stay out of yuan bonds after Russell’s World Government Bond Index (WGBI) starts to include Chinese bonds from October.

Masataka Miyazono (president of GPIF) cited three reasons why investing in Chinese bonds is risky for large investors like the GPIF in its minutes from the July board meeting. These minutes were made public on Wednesday.

The minutes were published on Wednesday. The size of GPIF’s investments scale means that the market liquidity is limited. Foreign investors cannot trade in futures,” he stated.

International investors have become more comfortable with Chinese government bonds in recent years. They are relatively cheap and offer decent yields when compared to the markets.

The 10-year Chinese bonds are more than 2.8%. The yield of U.S. 10-year bond yields just above 1.5%, while Japanese bonds are around 0%. The negative yields of German Bunds are found in Europe.

FTSE Russell has included China in its latest bond index provider. China is gradually opening up its bond market for foreign investors.

Some market players are sceptical that GPIF has made a financial decision, considering the rocky diplomatic relationships between these two countries.

The world’s third and second largest economies have clashed over a range of issues, including Taiwan and territorial disputes.

The director of a Chinese brokerage in Shanghai declined to identify himself because he was not authorized to talk to the media. He said that GPIF’s reasons behind their decision were weak.

“We have modified our settlement speed in order to assist them. T+3 only applies to them. They’re lying with their teeth,” he stated.

Reuters reported January 1 that Japanese investors such as the GPIF were wary of Chinese bonds.

GPIF uses WGBI to benchmark large amounts of foreign bond investment. It will now exclude Chinese government bonds.

This decision comes as Evergrande, the Chinese property developer, has been in debt. It raises concerns over some Chinese-led companies’ health.

International investors have become more worried about Beijing’s regulatory crackdowns on various industries, including education and fintechs.

($1 = 111.65 yen)