There was a time when it was difficult for foreign investors to access China’s A-shares equity markets. Exchange traded funds helped change that.
Accessing China’s massive onshore bond market has also been hard to access, but some new U.S.-listed ETFs are changing that as well. With developed market benchmark yields from Germany to the U.S. tumbling, now could be the time for bond investors to consider allocations to ETFs such as the Market Vectors ChinaAMC China Bond ETF (NYSEArca: CBON).
“Yields on China’s highest quality government and corporate bonds are in the 3% to 5% range. That’s for bonds with even the shortest maturities of 90 days,” reports Lewis Braham for Barron’s.
Just look at CBON. The ETF, which was the first China onshore bond ETF to debut in the U.S., has a 30-day SEC yield of 3.22% with a modified duration of four years. By comparison, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has a 30-day SEC yield that is 35 basis points below CBON’s, but LQD’s duration is double that of the Market Vectors ETF.
CBON tracks the ChinaBond China High Quality Bond Index (CDHATRID), holds government debt, quasi-sovereigns and high-grade corporate bonds. ssuers’ desire to increase offerings of Chinese onshore debt products is not surprising. Not only is Chian by far the largest emerging markets bond issuer, but its $1.5 trillion corporate bond market is the world’s largest. [First China Onshore Bond ETF Debuts]
“In June, credit agency Standard & Poor’s said the Chinese corporate bond market overtook the United States as the world’s biggest and is now set to soak up a third of global company debt needs over the next five years,” according to Reuters.
Beijing also serves as a fine backstop for CBON and rivals, such as the KraneShares E Fund China Commercial Paper ETF (NYSEArca; KCNY) and the Global X GF China Bond ETF (NYSEArca: CHNB).
China’s “government has generally bailed out bankrupt companies, preventing bonds from losing money. Also, the renminbi is among the most stable currencies, as the Chinese government largely pegs it to the dollar,” according to Barron’s.
KCNY, which launched in December, is off to a fast start with $31 million in assets under management in just two months on the market. KCNY, the first Chinese commercial paper ETF to list in the U.S., features an average maturity of just 128 days and a lineup comprised entirely of investment-grade holdings and tracks the CSI Diversified High Grade Commercial Paper Unhedged Index. [A Better Use of Cash With This ETF]
China’s flat yield curve increases the allure of KCNY, meaning investors do not need to take on the interest rate risk of long duration bonds to grab solid yields. Underscoring the opportunity with an ETF like KCNY, the three-month yield spread between Chinese and comparable U.S. government debt was 3.6% at the end of last year, according to KraneShares data.
Market Vectors ChinaAMC China Bond ETF