China’s Bond Market is Fueling Demand for Emerging Markets Debt

China is the proverbial tide that lifts all boats when it comes to emerging markets. Aside from equities, that precedent can be applied to the bond markets where a bevy of investor interest is pouring in for China bonds.

“China’s bond market – now the second largest in the world – has seen increased foreign participation, especially in its government bond market, where foreign ownership now exceeds 9%, up from a negligible level just a few years ago,” a PIMCO article noted in Seeking Alpha. “The trickle that began in 2014 with a highly controlled quota system turned into a steady inflow after the Chinese government loosened access and China earned inclusion into flagship bond indices. Whether or not this accelerates into an outright gush will depend on the evolving needs of individual investors.”

“One clear motive behind the influx of capital into China’s bond market is the search for yield,” the article added. “Chinese government bonds yield close to 3%; higher-quality Chinese corporates can yield 4% to 5%.3 With U.S. Treasury yields as low as they now are, some American investors, who have been less aggressive than their European and Japanese peers in searching for yield beyond their domestic market, may step up investments in overseas bond markets.”

Here are a pair of China-focused bond exchange-traded funds (ETFs) fixed income investors can consider:

  • VanEck Vectors ChinaAMC China Bond ETF (CBON): seeks to replicate as closely as possible the price and yield performance of the ChinaBond China High-Quality Bond Index. The index is comprised of fixed-rate, Renminbi (“RMB”)-denominated bonds issued in the People’s Republic of China (“China” or the “PRC”) by Chinese credit, governmental and quasi-governmental (e.g., policy banks) issuers (“RMB Bonds”).
  • KraneShares CCBS China Corporate High Yield Bond USD Index ETF (KCCB): seeks to provide investment results that track the price and yield performance of a specific fixed income securities index. The fund’s current index is the Solactive USD China Corporate High Yield Bond Index, which seeks to track the performance of outstanding high yield debt securities denominated in U.S. dollars issued by Chinese companies.

CBON Chart

CBON data by YCharts

As developing economies recover, fixed income investors who sense a value play in EM bonds can look to funds like the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG). EMAG seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of MVIS® EM Aggregate Bond Index (the “EM Aggregate Bond Index”).

The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, Euros or local emerging market currencies. The index includes both investment grade and below investment grade rated securities.

For more market trends, visit ETF Trends.