To capitalise on growing demand for yield-bearing investments, following a series of deposit-rate cuts by Chinese lenders that began in late 2022, money managers are drawing up strategies to invest in China’s fledgling tech-related bond market.
With ten Chinese firms having submitted applications to the securities regulator, the number of corporate bond exchange-traded funds in China is set to almost double to 21.
According to Brokerage Huaxi Securities Co, the ten Chinese firms that have submitted applications to the securities regulator to set up ETFs - which invest in notes that fund technology businesses - include E Fund Management Co, China Southern Asset Management Co and Invesco Great Wall Fund Management Co.
It’s understood that the growing popularity of China’s technology bonds dovetails with Beijing's ambitions to develop its innovative capabilities and counter Washington’s curbs as both nations vie for supremacy in the chip and artificial intelligence space.
Growing appetite for corporate bond ETFs in China also coincides with the rising popularity of the country’s fixed-income ETFs, with assets of bond ETFs jumping to 360 billion yuan from 180 billion yuan in the past six months.
“The fixed income ETF market is still small but is developing quickly,” said Shanghai-based Emily Gao, research department lead for Z-Ben Advisors, a financial markets consultancy.
“There has been strong demand for bond ETFs with significant inflows this year, so it is good timing to launch more products into the market.”
The proposed corporate bond ETFs will invest in so-called science and technology innovation bonds - a category of debt [unveiled earlier this year] that has already raised 374.8 billion yuan (US$52.2 billion).
According to Aaron Ni, investment director of fixed income for Asia at Aberdeen Investments, the issuance of these notes reflects China’s plans to diversify the issuer base of the bond market, while broadening the range of investment opportunities for global investors.
“The surge in credit ETFs signals “demand for more stable and transparent products, especially for previous bank deposit investors with low risk appetite,” Ni said.
According to Z-Ben Advisors, assets of bond ETFs jumped to 360 billion yuan from 180 billion yuan in the past six months alone.
This growth coincides with the rising popularity of fixed-income ETFs and based on Huaxi Securities’ data there are now 29 such ETFs in China.
What appears to be attracting a growing number of Chinese investors to fixed-income ETFs their greater liquidity compared with individual corporate bonds, while some of the instruments can be used as collateral on repo markets to meet short-term funding needs.
However, as demand for bonds rises, investors are having to settle for lower returns.
According to a ChinaBond index, the average yield on AAA-rated three-year corporate notes has dropped almost 40 basis points to 1.81% since reaching a high in March, close to the record-low of 1.67% set in January.
Last month both Betashares and Global X announced plans to launch new products focused on defined income and Chinese equities, respectively.
Global X announced the launch of the Global X China Tech ETF - the firm’s first China vehicle – to tap into Chinese innovation across semiconductors, robotics and electric vehicles.
The ETF will track 20 A and H-share companies selected for their growth, quality and momentum characteristics.
Meanwhile, Betashares will launch a range of three corporate bond ETFs to offer investors defined income with diversification and transparency.
The Betashares Defined Income Bond ETF range will consist of three fixed income ETFs offering attractive income and a defined maturity date.
Each ETF invests in a portfolio of investment-grade corporate bonds that mature in either 2028, 2029, or 2030.
