US exchange-traded funds target China onshore bond market

Investment firms in the United States are readying the first line of exchange-traded funds designed to give American investors access to China's swelling onshore bond market, which has been largely closed off to foreigners.

At least four fund managers - Deutsche Bank, Global X Funds, KraneShares and Van Eck Global - have outlined plans to launch China onshore-bond ETFs, according to company filings with the US Securities and Exchange Commission. The first of the funds could launch as early as this month, sources say.

Some of the funds will invest in a range of yuan assets, including government and corporate bonds, while others will be more specialised, focusing on commercial paper, for example. They will be targeted at both institutional and retail investors.

Gaining access is no small thing for investors. The government-related bond market is worth about US$3 trillion and China's domestic corporate bond market had grown to about US$1.5 trillion at the end of August, after companies raised a combined US$261 billion from bond issuance in the first eight months of the year. In June, credit agency Standard & Poor's said the Chinese corporate bond market overtook the US as the world's biggest.

While onshore Chinese bonds carry the currency, default and regulatory risks that might be expected in a fledgling market, their relatively high yields and low correlation to US Treasuries and other global fixed-income and equities markets will make them appealing to investors, analysts say.

"Yield levels are attractive," said Cecilia Chan, chief investment officer of fixed income for Asia-Pacific at HSBC Global Asset Management.

Ten-year yields on Chinese government bonds are hovering at around 4 per cent, compared with about 2.3 per cent in the US and Britain. If, as some investors expect, the Chinese economy slows further, then the value of high-yielding bonds will likely be bolstered as interest rates fall.