Several asset managers are readying China bond exchange-traded funds for launch in New York in the next few weeks, pointing to the higher yields still available on mainland debt compared to US issues.
E Fund Management (HK) and New York-based Krane Funds Advisors plan to list the KraneShares E Fund China Commercial Paper ETF before Thanksgiving Day on November 28. It will be the first to allow foreign investors access to Chinese interbank commercial paper (CP) under the reminbi qualified foreign institutional investor (RQFII) scheme.
Meanwhile, GF International Investment Management and New York's Global X Funds plan to launch their own China bond ETF in two weeks' time, AsianInvestor can confirm.
And Deutsche Asset & Wealth Management and partner Harvest Global Investments – the international arm of Beijing-based Harvest Fund Management – are readying a product, according to a US Securities and Exchange Commission filing. The firms declined to comment.
E Fund’s new ETF tracks the CSI Diversified High-Grade Commercial Paper index, a new customised benchmark comprising 526 CP issuers in China’s interbank market with an AAA issuer rating or A1 CP rating. This will be the first to offer such access; currently ETFs track indices on onshore interbank government bonds and offshore dim-sum bonds.
E Fund has used more than 70% of its Rmb27.2 billon RQFII quota and has reserved an initial Rmb2 billion for the new ETF. But since Hong Kong has already hit its RQFII limit of Rmb270 billion ($44 billion), some asset managers are short of quota.
Chinese onshore bond yields are higher than those in the US and Europe, which has been attracting US investors such as pension funds, banks, wealth managers and retail investors, noted David Zhang, deputy chief exeucutive at E Fund (Hong Kong). He has been busy meeting clients in New York.
China's government bond yield curve has flattened – at the low end, one-year issues are yielding about 3.25% – but CP will offer a higher yield to compensate for the higher credit risk it poses, Zhang said. The weighted average yield-to-maturity of the CSI Diversified High-Grade Commercial Paper index was 4.45% on November 5.
CP issues are short-term unsecured notes with duration typically shorter than a year. These instruments were introduced by the People’s Bank of China in 2005 with a view to building up an alternative financing platform.
Chinese companies had historically heavily on bank loans for financing, but CP has gradually replaced short-term bank loans over the past 10 years, due to regulators’ encouragement of direct financing in the capital markets, said Zhang.
However, US investors are concerned about credit risk in China, particularly following the first onshore credit bond default by Chaori Solar in March, noted Zhang. But it will take more time for investors to really study and understand this market, he said, and short-duration credits with high ratings could limit the default risk.