The Government Pension Investment Fund (GPIF), the world’s largest pension fund, has 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, from October. The pension fund will instead use a version of the World Government Bond Index (WGBI) that excludes Chinese government bonds, according to Hiroshi Nagaoka, an official at the pension fund.

Minutes from a July meeting of the pension fund’s board of governors released Wednesday showed that 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, Nagaoka said.

The decision comes amid a steady deterioration in the China-Japan relationship. It was not related to the issues surrounding China Evergrande Group, Nagaoka added. The Nikkei newspaper, which earlier reported the decision, had said that the debt crisis at the Chinese builder weighed on the fund’s decision.

“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 ($86.9 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 under management as of the end of June, including ¥47.8 trillion in foreign debt.

The pension fund does not currently invest in any yuan-dominated Chinese bonds, but had three euro-dominated Chinese sovereign notes in its portfolio as of the end of March, 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.

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