E Fund has joined the list of firms arguing that China's first bond default – by Chaori Solar Energy Science & Technology – is a good thing for the mainland debt market, as the asset manager today launches its first government bond exchange-traded fund.
The default will help the domestic high-yield bond market develop, argues Ma Jun, deputy chief executive at E Fund, who oversees the investment team.
Previously, there had been no default and the spread had compensated for the lack of liquidity of corporate bonds rather than the credit risk, he notes, adding that, as such, there is no "real" high-yield bond in China.
The default will change that situation, as the spread in the future will reflect the risk, and the yield spread will widen, notes Ma. As a result, China will have "real high-yield bonds" that compensate risk with higher yields.
At present, mainland corporate bonds offer a yield of around 8%, which is not attractive compared with yields available offshore, which can be as high as 15-20%, Ma says. Moreover, foreign investors tend to be cautious about China’s onshore credit ratings and unfamiliar with the market, meaning they are less willing to step into onshore corporate debt.
They tend to favour treasury bonds, he says, hence its launching an ETF that tracks the Citi Chinese Government Bond 5-10-Year Index, after receiving Rmb2 billion in RQFII quota in February 28. The fund raised Rmb500 million from its initial public offering.
While corporate credits have some default, Ma says this single case can’t be cited as an example of systemic risk in China.
“China has foreign exchange reserves of Rmb3-4 trillion and annualised GDP of 7-8%,” he says, adding that most mainland investment managers have established their own credit team for bond investment.
The People’s Bank of China is trying to liberalise the RMB and allow two-way movement rather than one-way appreciation, and such moves are affecting capital gains from bond investment.
Ma concedes that the currency will be more volatile, but says the most attractive part is the yield. He estimates that the government bonds can offer 4.5-5% yield in the near future, while financial bonds can offer 5.5-6%. “The yield will remain attractive in the coming 10 years.”
The E Fund Citi Chinese Government Bond ETF will track fixed-rate government bonds – and those with maturity of longer than 30 years are excluded from the index. The estimated total expense ratio is 0.45%.
Apart from the bond ETF, E Fund also plans to list a MSCI China A RQFII ETF in conjunction with London-based ETF Securities at the end of March, says Candice Cai, head of institutional business. The Ucits RQFII ETF will first will list on the London Stock Exchange.
The firm also plans to launch an ETF in New York, but is still considering which index to use, as MSCI China A is being considered for inclusion in the MSCI Emerging Market Index.
Last month CSOP listed the first RQFII bond ETF to track China five-year treasury bonds in Hong Kong.