Global investors may soon find it easier to access the Chinese debt market as a newly implemented settlement system was announced, potentially strengthening China bond-related ETFs.
A new settlement system for a bond investment scheme connecting the mainland to Hong Kong was announced, CNBC reports. The new program opens up the market to more investors by now meeting a widespread regulatory requirement.
Analysts argued that the new scheme could pave the way for the country’s debt securities to be included in a major global index, the Bloomberg Barclays Global Aggregate Index – investors may find it similar to what happened for China mainland listed stocks, which were recently included in the MSCI’s global stock indices.
The news means “a major hurdle” was cleared toward securing “smooth inclusion of China bonds into the Bloomberg-Barclays Global Aggregate Index,” Andre de Silva, HSBC’s head of global emerging markets rates research, and Pin Ru Tan, an Asia-Pacific rates strategist at the bank, said in a note.
The change was made to a program called Bond Connect, which allowed overseas investors from Hong Kong and elsewhere to invest in Chinese bonds through investment links between Hong Kong and mainland China. The recent changes fully implemented a new settlement system know as real-time delivery-versus payment, or RDVP, which ensured payments and deliveries occur simultaneously.
“The full implementation of RDVP for Bond Connect enables international investors under (some) regulatory requirements to join the scheme and seek investment opportunities in China Interbank Bond Market,” Bond Connect said in a release.
The increased demand that could come with the new delivery system could help strengthen the Chinese bond markets.
Fixed-income exchange traded fund investors can also gain exposure to the Chinese debt markets through targeted ETF strategies. For example, the Invesco Chinese Yuan Dim Sum Bond Portfolio (NYSEArca: DSUM) is composed of RMB-denominated bonds issued by governments, agencies, supranationals and corporations, excluding synthetics, convertible bonds, retail bonds and CDs.
The KraneShares CCBS China Corporate High Yield Bond USD Index ETF (KCCB) tracks an index that covers high-yield corporate debt from companies located in China.
Additionally, the VanEck Vectors ChinaAMC China Bond ETF (NYSEArca: CBON) follows the ChinaBond China High Quality Bond Index (CDHATRID), which holds government debt, quasi-sovereigns and high-grade corporate bonds.
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