Hong Kong-listed exchange traded funds that invest in China Treasury and government bonds have attracted huge inflows even though the corporate bond market is rocked by an increasing number of defaults.
The interest in China's government bonds has been spurred by investors seeking returns in a low-interest rate environment, as well as the rising number of inclusions by major index providers, according to experts.
BlackRock's iShares China Government Bond ETF, which was only listed on the Hong Kong exchange on October 21, raised Rmb 3.25 bn $508.8 m as of November 18. iShares Short Duration China Policy Bank Bond ETF, listed on the same day, has raised Rmb 265 m.
The Exchange Traded Funds track the FTSE Chinese Government Bond Index and Chinese Policy Bank Bond Index just a week before FTSE Russell started on October 29 to include Chinese debt into its flagship World Government Bond Index, a move that was expected to direct billions of dollars of global investor money into the Chinese onshore fixed-income market.
China's onshore bond market is the world's second largest and is valued at more than $19 tn, but China's share of total fixed income securities issued globally is only 15 per cent.
Peter Loehnert, head of iShares and index investments for Asia Pacific at BlackRock said that the inclusion of Chinese government and policy bank bonds in key global indexes widens the window of opportunity for investors who are keen to tap into China's onshore bond market.
BlackRock's largest rival in Hong Kong'sETF market, CSOP Asset Management, has benefited from a strategic fee cut to its equivalent China ETF in the market.
In September and October, the seven-year old CSOP Bloomberg Barclays China Treasury Policy Bank Bond ETF attracted inflows of $197 m and in October $25 m, which was followed by even larger inflows of $500 m million in the first three weeks of November. The total assets of the ETF were up to Rmb 5.03 bn as of November 19.
The big uptick in inflows in the CSOP Bloomberg Barclays China Treasury Policy Bank Bond ETF took place after the manager slashed the total expense ratio from 0.5 per cent to 0.28 per cent.
The fee level of the CSOP product is the lowest among similar strategies using the same index, at 28 basis points.
The Hong Kong-listed ChinaAMC Bloomberg Barclays China Treasury Policy Bank Bond ETF, which has a total expense ratio of 0.85 per cent, has attracted inflows of only $2,611 and $7,329 in September and October.
In October, BlackRock's Ireland-domiciled iShares China CNY Bond ETF, which also tracks the same index and has a total expense ratio of 0.35 per cent, had outflows of $135 m in October, following inflows of $250 m in September. It currently has $13 billion in assets.
The group had been talking to potential clients before the fee cut, according to Melody He, Hong Kong-based managing director and head of business development for CSOP AM.
According to Rebecca Chua, Hong Kong-based founder of Premia Partners, institutional investors are getting more comfortable holding Chinese government bonds due to the ongoing global index inclusion exercises. Chua said she expects demand for China s onshore government bonds to continue.
The fund's inflows from the past few weeks have added up to 50 per cent increase in the fund's total assets from the end of October, Chua said.
The prospect of China's onshore government bond is not being swayed by international investors.
Japan s 193.3 tn $1.7 tn Government Pension Investment Fund, for instance, has decided to exclude renminbi-denominated Chinese sovereign bonds from its portfolio despite the inclusion of China's government bonds into the flagship WGBI index.
The GPIF cited limited liquidity of the Chinese onshore bond market, limited futures trading options for non-Chinese investors and exclusion from international settlement systems as the reasons for excluding renminbi-denominated Chinese sovereign bonds from its portfolio.
The interest in onshore government bonds comes at a time when China's offshore corporate bonds industry is facing a major crisis due to a series of missing deadlines to pay their coupons by major Chinese real estate developers such as Evergrande and Sinic.
The flows for China government bonds are not really impacted by the recent corporate bonds shockwaves, as the use cases and audience are quite different, said Premia Partners Chua.