BlackRock has launched a new fixed income ETF in Europe, providing exposure to renminbi-denominated government and policy bank bonds issued in China.
Vasiliki Pachatouridi, Head of iShares EMEA Fixed Income Strategy, BlackRock.
The iShares China CNY Bond UCITS ETF has listed on Euronext Amsterdam in US dollars (CNYB NA) and on Deutsche Börse Xetra in euros (ICGB GY).
The fund tracks the Bloomberg Barclays China Treasury + Policy Bank Index through physical replication using a stratified sampling technique.
The index reflects the performance of fixed-rate RMB-denominated treasury bonds and policy bank bonds listed on the China inter-bank bond market.
Eligible securities must be rated investment grade and have a minimum of one year to maturity.
The index currently contains 346 bonds. Nearly half (46.5%) of the index is allocated to bonds issued by the Chinese government, with the remaining weight assigned to bonds from China Development Bank (29.6%), Agricultural Development Bank (15.1%), and Export-Import Bank of China (8.8%). These three policy banks are responsible for financing economic and trade development as well as state-invested projects.
The ETF may appeal to investors searching for increased yield without venturing into junk bond territory – the underlying index is currently yielding 3.4%. It may also serve as a portfolio diversifier with BlackRock noting that China bond yields have historically exhibited a near-zero correlation with developed countries’ government bonds.
The fund comes with moderate interest rate risk with the underlying index showing an effective duration of 5.5 years.
The fund has an expense ratio of 0.35%. Income is distributed to investors on a semi-annual basis.
Bond market liberalization
China’s onshore bond market is the second-largest globally, having grown at close to 20% per year to reach $12.4 trillion. Despite this, less than 3% is owned by foreign investors, compared to 41% for US Treasuries.
BlackRock believes foreign ownership is poised to expand rapidly, driven by better access channels and greater alignment of China’s bond market with international standards. Demand is expected to also receive a boost from the inclusion of China in major global indices.
Index provider Bloomberg has already begun this process, adding Chinese sovereign and bank policy bonds to the flagship Bloomberg Barclays Global Aggregate Index according to a 20-month inclusion schedule running from April 2019 to November 2020.
China’s weight in the global benchmark is predicted to reach 6% by the end of the inclusion process, and BlackRock estimates over $150 billion of inflows from foreign investors rebalancing passive strategies tied to the index.
Vasiliki Pachatouridi, Head of iShares EMEA Fixed Income Strategy, commented, “The investment case for China is clear – it boasts the second-largest bond market in the world, its bond yields are higher and bond return correlations lower compared to major developed countries. The iShares China CNY Bond UCITS ETF provides a single access point to China onshore bonds, offering investors ease of access and operational efficiency.”
Wei Li, Head of iShares EMEA Investment Strategy, added, “When it comes to the immense structural opportunity in China, think ‘2-2-2’. With the second-largest stock and bond markets and only 2% foreign ownership, China is expected to attract two-hundred billion dollars in inflows from this year’s inclusion events.” [Includes equity flows].
The launch comes just one month after BlackRock unveiled the iShares MSCI China UCITS ETF (ICHN NA) in Europe. The fund is linked to the MSCI China Index which covers broad exposure to multiple share classes of Chinese equities.