This story first ran in Financial Advisor IQ's sister publication, Ignites Asia.
Chinese regulators have asked domestic securities brokerages to promote bond-based exchange-traded funds, in a signal that authorities are backing the use of such products to finance more infrastructure projects to boost the economy, the China Securities Journal reports.
The China Securities Association, the industry’s self-regulatory body, has issued a directive to member firms, encouraging them to promote the growth of the onshore bond ETF market, people familiar with the matter tell the publication.
Brokers operating in the country have been urged to step up marketing and sales campaigns for such products, to attract long-term capital from investors of all stripes, according to the document seen by the publication.
They have also been asked to improve the experience they offer to investors by lowering subscription fees and streamlining the purchasing process. Brokers have also been told to play an active role as market makers by improving liquidity levels and price efficiency.
“Bond ETFs are important investment vehicles to fulfill Chinese investors’ demand for diversified investment,” the CSA writes in the directive. “As intermediaries that respond to investors’ orders, our brokerage members are a vital part of the growth of the bond ETF market.”
The move gives a clear message to Chinese financial institutions to double down on efforts to boost the onshore bond-focused ETF industry. Three weeks ago, regulators greenlit the country’s first batch of eight ETFs that invest in policy bank bonds, which finance large-scale official infrastructure projects and are seen by many investors as a close alternative to Chinese government bonds.
The new ETFs by eight leading fund houses in the country obtained final approval from the China Securities Regulatory Commission on July 11, regulatory filings show. They will capture policy bank bonds issued by China’s three state-controlled development banks, covering a host of maturity ranges.
China’s bond ETF market still remains very small. There are just 13 existing bond-themed ETFs running a combined Rmb33.6 billion ($4.98 billion) in assets, according to Wind Info, representing less than 2% of all onshore ETFs assets. Comparatively, there are 191 bond index funds in the onshore market with an overall asset size of $83.3 billion.
The largest bond ETF in China is the HFT CSI Commercial Paper ETF from HFT Fund Management, a fund joint venture between BNP Paribas and Haitong Securities. The ETF has seen its assets balloon nearly 30 times to $2.2 billion over two years since its inception, accounting for nearly half of the assets of all onshore bond ETFs.
Bond funds in China, which numbered more than 4,270 as of end-June, have grown in popularity as risk-averse investors seek shelter for their capital. These funds added $12.8 million in returns in the second quarter, the third most of all onshore funds.
China’s bond ETFs are growing relatively slowly because they tend to only follow debt securities tradable on exchanges, such as corporate bonds, government bonds and local government debts, according to Zhu Zhengxing at Fullgoal Fund Management.
“But as the publicly traded bond market and interbank bond market connect more closely, the gap between them is set to narrow,” he adds.
The policy bank bond ETF approvals come as new bank lending and credit quotas for policy banks soared in China in June, as the central bank has been keen to issue new measures to revive the country’s pandemic-hit economy.
In the same month, provincial governments sold a record $290 billion worth of bonds in a new push of debt-fuelled infrastructure investment. The huge sum was up by over 140% year on year, according to Great Wall Securities.