China has opened up its borders to international investors to expand its $9 trillion bond market. The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBOC) came to a consensus on introducing a cross-border trading platform. Per Bloomberg, this link aims to spur foreign inflows through Hong Kong into the Chinese bond markets, currently the third largest in the world.
Initially, the trading would only be one sided, with funds flowing only from Hong Kong to mainland China. Moreover, investments will not be subject to quotas. Details regarding the start of the bond-connect system haven’t been provided yet.
The platform is expected to follow trading links similar to the existing ones between Hong Kong-Shanghai and Hong Kong-Shenzhen. Initially, the only difference would be that the equity links allow money to flow from mainland China to Hong Kong as well.
This move is aimed at furthering China’s goals to expand its markets and become a global financial hub. It targets to ease investment constraints and provide convenience to international investors to portray their markets as a lucrative option for investors to park their money.
A memorandum of understanding between the two regions would be signed in order to monitor the development. Authorities in both the regions expect to collectively supervise the implementation.
Let us now discuss a few ETFs focused on providing exposure to the Chinese bond markets (see all the Asia Pacific ETFs here).
This fund seeks to provide exposure to Chinese renminbi denominated bonds traded in the Dim Sum bond market. It has AUM of $40.9 million and charges a fee of 45 basis points a year. It trades in the short end of the maturity spectrum, evident from its effective duration of 1.59 years and average maturity of 1.72 years. The fund has returned 2.25% in the year-to-date time frame but lost 4.81% in the past one year (as of May 16, 2017).
This fund seeks to provide exposure to renminbi denominated investment-grade commercial paper. It has AUM of $9.87 million and charges a fee of 57 basis points a year. It trades in the short end of the maturity spectrum, evident from its effective maturity of 0.33 years. The fund has returned 2.44% in the year-to-date time frame but lost 2.79% in the past one year (as of May 16, 2017).
This fund seeks to provide exposure to renminbi denominated fixed rate bonds issued in the People’s Republic of China. It has AUM of $6.6 million and charges a fee of 50 basis points a year. It trades in the short end of the maturity spectrum, evident from its effective duration of 4.06 years and effective maturity of 4.71 years. The fund has lost 0.60% in the year-to-date time frame and 8.08% in the past one year (as of May 16, 2017).
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