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 (NYSEArca: CBON).
Chinese monetary policy 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).
“The story doesn’t end there. These ETFs may get a further boost in early November, when the InMarket Vectors ChinaAMC China Bond ETF ternational Monetary Fund is expected to announce that the yuan will join the fund’s basket of reserve currencies. According to reports, the IMF is giving strong signals that the yuan will be included, to the point where Chinese officials are said to have prepared celebratory statements,” reports Eric Balchunas for Bloomberg.
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.
CBON, which tracks the ChinaBond China High Quality Bond Index (CDHATRID), holds government debt, quasi-sovereigns and high-grade corporate bonds.
“China’s onshore China debt is the world’s third largest, at $6.5 trillion and making up 35 percent of total emerging market debt. While the onshore equity market has around 3 percent foreign ownership, the onshore bond market has even less with only 2 percent of it owned by foreign investors, according to Brendan Ahern, managing director of KraneShares,” reports Bloomberg.
Market Vectors ChinaAMC China Bond ETF
