Investing in China bonds in 2020: UBS ETF and analysis

The China government bond market is a good investment opportunity because among the very few, in this period, with positive returns; moreover, the Chinese public debt is among the lowest in the world, in percentage of GDP.

investing in china bonds

Already in 2019 the central banks stimolus had brought a substantial part of government bonds to negative yields. A situation that, by contrast, had opened the doors to a prolonged rally on the stock market. At the end of the year, analysts and managers wondered if an event would come that would change the situation: as you know, the “black swan” has arrived and it is the coronavirus crisis. Central banks have started pumping money back into the system with expansive monetary policies and government bond yields have declined even further. The exception is China government bonds, with rising yields.

China government bonds are now an interesting investment, so much so that there is a special J.P. Morgan index that acts as a benchmark for the UBS ETF called J.P. Morgan CNY China Government 1–10 Year Bond UCITS ETF: let’s analyze the chinese bond market and see the characteristics of this investment fund.

Government China bonds: market situation and types of bonds

The China bond market is the fourth largest bond market after the USA, Europe and Japan. However, China is underweight in global market indices, especially in the fixed income securities sector. If we take the Bloomberg Barclays Global Aggregate index as a reference – a basket that tracks bonds issued by developed and emerging markets around the world – China’s weight in March 2020 is only 3.1%, despite market capitalization. of 3.3 trillion US dollars.

In 2020 there are more and more bonds with a negative return: as much as 24% of the global fixed income market has returns in reverse. Instead, China bonds have positive returns. Furthermore, the Chinese public debt – in relation to the gross domestic product – compared to that of developed countries is much lower (just over 50% of GDP). Further reason why you can look at these fixed income securities with some interest.

China government bonds are mainly of three types:

  • Treasury Bonds issued by the Ministry of Finance, which can be traded on the Chinese interbank market and have maturities available between 3 months and 50 years
  • Policy Bank Financial Bond, issued by the China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank Of China, with maturities between 1 and 10 years (also tradable on the Chinese interbank market)
  • debt securities issued by Chinese local administrations with maturities ranging from 1 to 20 years

Investment funds and ETFs select a mix of these three categories of government China bonds.

UBS offers a China government bond ETF

The J.P. Morgan China Government + Policy Bank 20% Capped 1-10 Year Index is the reference benchmark for the homonymous ETF – open exchange rate against the euro – proposed by UBS, which is based on the two most liquid categories of the market: Treasuries Bond and Policy Bank Financial Bond.

This J.P. Morgan CNY China Government 1–10 Year Bond UCITS ETF (ISIN LU1974693662) aims to monitor the performance of “admissible government bonds and state fixed-rate development banks”, denominated in yuan, with maturities of between 1 and 10 years ( among other things, it is the only product on the 1-10 years stretch). By “admissible” it is understood that the securities must be listed on the Chinese interbank market. As for the index part composed of securities issued by the three development banks, the exposure to each of them has a limit set at 20%, and the excess of the market value that will be redistributed in all the sectors of the index on a proportional basis.

The index uses this stock selection method after analyzing various market data. The maturity filter, from 1 to 10 years, guarantees a certain market liquidity to the product. In fact, debt securities with a lifetime greater than 1 year and not more than 10 years have a significantly higher quantity of volumes traded than all the others. The addition of Policy Banks also increases overall return because their bonds perform more than government bonds. Finally, the 20% constraint should allow for a better representation of what the Chinese bond market is.

One Reply to “Investing in China bonds in 2020: UBS ETF and analysis”

  1. Hi Christian, very good analysis!, I never considered Chinese bonds as part of my portfolio but definitely worth keep them at least on my watch list.
    However there are 2 non measurable factors that worries me and make me considerate Chinese bonds as a high risk investment instead of safe haven like US, EU or Japan Govt. bonds:
    1) It is just one Emerging country and they might change the rules or even their entire economy in a heart beat.
    2) China and their companies are well know for counterfeit their numbers, you can’t really trust them. Even if are reports from recognized international organizations, many times they uses the studied country official numbers as input making their reports unreliable.

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