Hang Seng Bank launched a mainland China bond fund yesterday for investors eager to profit from the appreciation of the yuan, at a time when interest rates on Hong Kong dollar deposits are near zero. The city's first mainland bond fund authorised by the Securities and Futures Commission will invest directly in the mainland bond market through a qualified foreign institutional investor scheme. The bank said the fund will invest mainly in mainland government debt securities, such as government bonds, central bank bonds and policy bank bonds. The annual yield of mainland government bonds maturing in three to five years ranged from 3.95 per cent to 4.11 per cent on May 21. Frank Kwong See-wah, chairman of the Hong Kong Capital Market Association, said such products would be attractive because the mainland government bond yield is well above the Hong Kong dollar deposit rate. He said bond funds, by their nature, were diversified and the credit risk was small if it mainly invested in government bonds. However, unlike a conventional bond with a maturity date, when investors can get their principal back, bond funds invest continuously. 'Investors still run the risk of not getting their full principal back if the fund has performed badly at the time they sell it,' Mr Kwong said. He said such funds should be suitable for long-term investors who have confidence in the mainland market and who expect the yuan will appreciate on a very long period of time. Investors looking for higher returns than on Hong Kong dollar deposits, along with capital preservation, could consider conventional yuan bonds, although there are no new issues on the market at this time. However, Mr Kwong said investors could still buy such traditional yuan bonds in the secondary market from banks, since some mainland lenders issued them in the city last year. The market also widely expects some mainland lenders to issue yuan bonds in Hong Kong as early as next month.