One of the most interesting developments in the Global Fixed Income space has been the rising prominence of the China Bond Market onto the world stage.
Firstly, the China Bond market is a relatively nascent one. (Fun fact – The first Chinese government bond was issued as recently as 1981). Secondly, this market has traditionally been always closed to foreign investors. And for good reason. China has always adopted a cautious approach to the inflow of foreign money. And as good economics would suggest, it has prioritized longer term investment alternatives like FDI over hot money alternatives like short term bond investments. However, as China takes a more prominent role in World politics and the gradual ascent towards establishing RMB as the global reserve currency alternative, liberalization of the foreign exchange market and internationalization of its Bond market are critical milestones to achieve.
The total China Bond market, by some estimates at $13Tn, is now second largest in the world, behind the US and having overtaken Japan. Yet, it is predominantly a domestic only market with minimal foreign investor participation. Make no mistake – the foreign investor participation is growing significantly. But nonetheless still comprises a small portion of the total investable bond market. Estimates suggest foreign investors hold approximately 3-5% of the total market size. The onshore market is dominated by Commercial Banks. Approximately two thirds of the bonds outstanding are said to be held by the Commercial Banks. Digressing to a macro note, this means that the economy is still dependent on the strength of the Banking sector and the desired level of dependence on and resilience of the capital markets is still some distance away.
Historically Investors have shied away from this market for the most well-known of reasons, a tough approval regime, investment quotas, difficulty of repatriating profits and accessing the onshore China Fx market to hedge the bond investment exposures. The first change came in July of 2015 when PBOC allowed foreign official institutions to directly access the China Inter-bank Bond Market (“CIBM”). Subsequently in Feb 2016, the PBOC started allowing “recognized” long term institutional investors to access the CIBM. Lastly in July 2017, China officially launched the much awaited Bond Connect program.
Yet, the most significant development in this space has been the inclusion or upcoming inclusion of China Bonds into the most popular and vastly tracked Global Bond Indexes. The first to go live was Bloomberg Barclays Global Aggregate Index. In January 2019, Bloomberg announced that Chinese RMB denominated government and policy bank securities will be added to the Index starting April 2019. Needless to say, the actual inclusion into the Index will be phased in, but when completed, Bloomberg anticipates it to be the 4th largest component in the Aggregate after USD, EUR and Japanese Yen. Anticipated to have a weight of 6% of an approx. $54 Trillion Index! Not all of the funds tracking the Index will pursue or have the mandate to invest in China Bonds. There will be alternative indexes created within this Category that exclude the Chinese Bonds. Yet, it is estimated that about $300-400Bn of investments will start flowing into the China Bond market with its inclusion in the Bloomberg Barclays Global Aggregate Index as well as FTSE World Government Bond Index and and JPM Government Bond Index – Emerging Markets.
There are some compelling arguments for the case of investing in the China Bond Market. Firstly, in a world where almost $17Tn market value worth of debt is negative yielding, the 2.5% – 3% that China government securities offer looks stellar in comparison. Add the fact that this is A/A+ rated the return looks even more appealing on a risk adjusted basis. Secondly, there have been enough number of studies which have shown negative correlations between Chinese bonds and global equities.
Let’s look and compare some of the alternatives to invest in the China bond market – both government and quasi-government as well as the corporate space. Below is a table summarizing some of the open-ended Mutual Fund investment alternatives that provides exposure to the China Fixed income space.
|Blackrock China Bond Fund||Fidelity China Bond Fund (3)||JPM China Bond Opportunities (4)||Neuberger Berman China Bond Fund|
|Mod. Duration / Time to Maturity||3.98 Yrs||NA||3.4 Yrs||1.77 Yrs|
|Inception||Nov 2011||NA||Jan 2020||NA|
|Dist. Class Available||Yes||No||Yes||Yes|
|Currency Class Available||Yes||Yes||Yes||Yes|
|Annualized Return since inception||5.58%||3.86%||4.4%|
- Fund AUM, YTM, Duration figures are as of around end October / November 2020 for all the funds
- The fund returns are on an NAV to NAV basis assuming reinvestment of dividends and after factoring in management fee / expenses
- Fidelity Fund includes exposure to other EM. 62% geographic exposure to China as of 31 Oct 2020
- JPM Fund also includes exposure to other EM, not just China.
The Neuberger Berman China Bond fund, in particular, is specifically focused on the China corporate bond sector with minimal exposure to govt or govt policy banks. Approx.72% is invested in onshore Chinese bonds and 27% is invested in offshore Chinese bonds with almost half being BB rated.
In line with the proliferation of passive investment strategies and the ETF boom, the China Fixed Income space has also started seeing its share of ETFs. Below are some of the alternatives that currently are available to investors, especially for the China government and policy bank bonds.
|ICBC CSOP Chinese Govt Bond Index ETF||Nikko AM ICBC SG China Bond ETF||iShares China CNY Bond UCITS ETF||Harvest China Government Bond UCITS ETF||Goldman Sachs Access China Govt Bond UCITS ETF|
|Fund Inception Date||Sep 2020||Nov 2020||Jul 2019||Jul 2015||Oct 2019|
|Listing Date||Sep 2020||Nov 2020||26 Oct 2020||Jul 2015||Oct 2019|
|Underlying Index||FTSE Chinese Govt Bond Index||China Bond ICBC 1-10 Yr Treasury and Policy Bank Index||Bloomberg Barclays China Treasury + Policy Bank Index||CSI Gilt Edged Medium Term Treasury Bond Index||FTSE Goldman Sachs China Govt Bond Index|
|Listed Currencies Available||USD, SGD||SGD||USD||USD||USD|
|Mgmt Fee / Expense Ratio||0.25%||0.3%||0.35%||0.4%||0.35%|
|Effective Duration||5.64||4.0 Yrs||5.61||5.03||5.6|
|Weighted Avg Maturity||7.5 Yrs||NA||7.5 Yrs||NA||7.5 Yrs|
|Dist. Class Available||Yes||Yes||Yes||Yes||Yes|
|Annualized Return since inception||NA||NA||6.48%||1.35%||8.0%|
Both the ICBC and Nikko AM ETFs are relatively new having established the fund and commenced trading in late 2020. Both are domiciled in Singapore – a testament to Singapore’s efforts to attract more fund management industry participants to set shop in the country and to be a prime destination for funds to entice global investors. The ICBC CSOP ETF in particular has quite a sizeable fund size at inception. As the attractiveness and acceptance of Chinese bonds grows amongst the international investor community, these ETFs are well poised to increase assets under management.