Global fixed income investors are looking back into Chinese bonds after a temporary pullback, targeting debt outside of sovereign debt to capture more attractive yields and returns. Investors can also examine China bond-related exchange traded funds to get exposure to this market.
Bonds issued by Chinese “policy banks,” which include public funds to areas such as trade, infrastructure, and agriculture, are attracting more attention, Nikkei Asia reports.
“Foreign investors are now comfortable with Chinese government bonds and are now creeping down the curve to policy bank bonds. It is an evolution of the risk appetite,” Jason Pang, a Hong Kong-based portfolio manager at J.P. Morgan Asset Management, told Nikkei Asia.
Global investors are expected to raise their exposure to China’s bond market as Beijing opens up its markets and the region is added to more global bond indices. For instance, China is set to be included in the FTSE World Government Bond Index and could attract as much as $150 billion in passive money flows, according to analysts.
“We assisted many foreign investors in applying and obtain(ing) QFII licenses, including several top-tiered global hedge fund and private fund management companies with sizeable investments or plans,” Vicky Tsai, Head of Securities Services for Citi China, told CNBC, referring to the increased demand for Qualified Foreign Institutional Investor (QFII) licenses.
Foreign institutional investors have been particularly interested in China’s bond markets. According to Natixis data, foreign share of mainland China’s bond market hit 3.44% in April, compared to 3.2% in December. Foreign investors added a net 58 billion yuan, or $9 billion, of mainland Chinese bonds in April, more than reversing net redemptions of 9 billion yuan over March.
Investors can access China’s debt markets through strategies like the KraneShares E Fund China Commercial Paper ETF (NYSEArca: KCNY). The ETF follows a diversified basket of investment-grade commercial paper denominated in on-shore renminbi issued by sovereign, quasi-sovereign, and corporate issuers in the People’s Republic of China and traded in the inter-bank bond market. Commercial paper in the Fund is investment-grade and has a remaining term to final maturity of no more than one year and no less than one month.
Additionally, the KraneShares CCBS China Corporate High Yield Bond USD Index ETF (KCCB) can provide exposure outstanding high-yield debt securities denominated in U.S. dollars issued by Chinese companies.
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