This is because China’s $4.5 trillion domestic bond market is more than 40 times larger than the Hong Kong offshore market, and is the third largest bond market in the world. But it is only open to domestic investors. In order to provide access to foreign investors, the race for China bond market has heated up strongly with three ETF providers already made their entry into this untapped space in less than a month.
KraneShares, one of the leading China ETF providers, launched KraneShares E Fund China Commercial Paper ETF on December 2 in coordination with E Fund Management, the largest fixed income manager in China and the second largest RQFII manager globally. Though the fund represents the third China onshore bond ETF, it focuses on ‘niche’ strategies’ unlike the other two and targets the exclusive commercial paper segment.
Investors should note that China’s commercial paper market has been large and liquid with more than $270 billion in outstanding amount and $3 billion in average daily volume.
KCNY in Focus
This new ETF seeks to preserve capital while delivering attractive yields. It is easily done by tracking the CSI Diversified High Grade Commercial Paper Index. The fund invests in a 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.
The product provides investors access to China’s interbank bond market, where more than 90% of all onshore bond trading takes place.
In terms of holdings, China CNR and China Guodian occupy the top two positions in the basket with 15.7% share each while Beijing Energy Investment Holding and Guangzhou Port Group round off the top four with 7.8% share each. Other securities hold about 3.9% of assets. Average maturity of the fund is just 128 days which is less than five months and expense ratio came in at 0.56%.
How does it fit in a portfolio?
This ETF could be an intriguing choice for investors seeking a steady stream of income and higher yields in the current ultra-low rate environment. The fund can be used as an alternative to the lower-yielding U.S. money market funds and bank deposit programs. This is because commercial paper offers superior dividend yield as well as stability during the turbulence times.
China commercial paper provides an opportunity for global investors to diversify their cash positions, maintain an average maturity close to U.S. money market funds and generate higher monthly returns than U.S. commercial paper. This is especially true as China commercial paper delivered returns of 5.85% over the trailing one-year period when compared to gains of just 0.20% for U.S. commercial paper and 0.16% for U.S. deposit rates.
The China onshore bond ETFs are new in the market and have a large scope of expansion. While KCNY is the first China commercial paper ETF, it could face fierce competition from the two recently debuted China onshore bond ETFs –Market Vectors ChinaAMC China Bond ETF (CBON) and Global X GF China Bond ETF (CHNB).
CBON tracks the ChinaBond China High Quality Bond Index, holding 28 Renminbi denominated bonds. It has a weighted maturity of 4.62 years and modified duration of 4.58 years. On the other hand, CHNB follows S&P China Composite Select Bond Index and holds 22 Renminbi denominated bonds issued by governments, agencies, and Central State-Owned. Both products have pulled in solid $19.8 million and $49 million, respectively, in less than a month and charges 50 bps in annual fees.
Given the huge success of the duo, it would not be much difficult for KCNY to see big inflows and solid investor interest given that it generates decent returns and higher yields.
Further, the recent spate of onshore China bond ETF launches reflect strong investors’ appetite for these types of funds and the country’s mammoth presence in the global fixed income market. About one-third of the global corporate debt needs will likely come from Chinese companies over the next five years. This suggests that investors will keenly look for exposure to this specific corner of the emerging market bond space in the coming months.
This article is brought to you courtesy of Zacks.