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China’s onshore bond market has grown to the world’s second-largest after the US. It has a low correlation with other bond markets, it is more influenced by domestic factors. This makes China bond funds an interesting tool for portfolio diversification.
In short, China’s fixed income universe can be separated into three markets: The renminbi (CNY)-denominated onshore market, the CNH-denominated° offshore market and the foreign currency-denominated market (mostly in USD).
The onshore market is vast and includes a diversified universe of issuers: local government bonds, Chinese government bonds, policy bank bonds, corporate and enterprise bonds, interbank deposits, financial bonds, medium-term notes, central bank bills and other credit bonds.
While the government is the largest issuer onshore, non-financial corporations are the largest borrowers in the offshore markets. Offshore bonds are primarily traded in Hong Kong, they are also commonly called “dim sum” bonds. They are also accessible as part of the majority of emerging market corporate bond indices. Chinese issuers, e.g., make up a large part of the J.P. Morgan Asia Credit Index.
Previously, the onshore market was not accessible to overseas investors. Following years of deregulation and liberalisation, the market is more open now and since 2017, Chinese onshore bonds can also be traded abroad without the previous restrictions.
Within the Chinese bond market, corporate bonds have witnessed an dramatic growth in recent years. According to a research paper published in Journal of Finance and Data Science, the outstanding amount of Chinese corporate bonds climbed from 1.26 tn yuan ($180 bn) in 2008 to 31.13 tn yuan ($4.38 tn) in 2022, denoting almost 22% of China’s total bond outstanding.
Meanwhile, the nation’s new finance minister Lan Foan, stated in November, that China would accelerate the issuance and deployment of government bonds to boost the economy.
As the Chinese economy is struggling to recover from the Covid-19 pandemic, foreign investors became cautious about investing in the country. Hence, the market has seen outflows of equities and bonds.
However, Fidelity International sees the outflows not as a broader shift. “There have been outflows this year by international investors as the 10-year US treasury yield premium widened over similar-maturity China government bonds (having touched the highest levels in over two decades in October, in fact), but we view these as tactical moves rather than a structural shift,” said Alvin Cheng, portfolio manager at Fidelity.
Choosing a China bond fund
There are various strategies on the market for investors who want to diversify their portfolio with a China bond fund. We picked three with slightly different profiles, invested onshore and offshore.
abrdn SICAV I – China Onshore Bond Fund
The first fund in our list, the abrdn SICAV I – China Onshore Bond Fund, invests at least two-thirds of its assets in bonds issued by governments, government-related bodies, and/or corporations in Mainland China, denominated in renminbi (CNY). The fund may invest upto 100% of its assets in Mainland Chinese bonds listed or traded on Chinese Markets. However, the Onshore Bond Fund by abrdn may also invest in offshore bonds denominated in renminbi (CNH) issued by governments, government-related bodies, or global corporations.
The fund aims to outperform the FTSE Chinese Government Bond Index (CNH) benchmark and has assets under management (AUM) of 474.5 mn CNH ($66.18 mn). The top 5 holdings of this fund are China (Govt of) 3% 2053 (10.8%), China Development Bank 4.88% 2028 (7.3%), China Southern Power 2.83% 2025 (6.7%), China (Govt of) 2.89% 2031 (6.6%), and China (Govt of) 2.62% 2028 (6.6%).*
97.9% of the fund invests in China, 2.10% is in cash, and based on assets, the fund’s composition includes Government (47.2%), Quasi Sovereign (37.6%), and Financials (13.1%).* The Fund will not purchase securities that are rated below B- by Standard & Poor’s (‘S&P’) or equivalent from another rating agency, hence, 91.5% of the fund’s allocation is A-rated.
Over the past year the abrdn China Onshore Bond Fund earned a return of 1.94% (gross), compared to 2.31% of the benchmark.*
Launched on 31st May 2018, the abrdn SICAV I – China Onshore Bond Fund is managed by Adam McCabe, the Head of Fixed Income, Asia Pacific at abrdn. There is no entry charge for the fund. The annual management charge stands at 0.35%.
Fidelity Funds – China RMB Bond Fund
The second China bond fund in our list primarily invests in investment grade Renminbi-denominated corporate bonds. More precisely, the Fidelity Funds – China RMB Bond Fund invests at least 70% of its assets in investment-grade corporate securities denominated in RMB, investment grade securities of issuers that do most of their business in the Asia Pacific region, securities denominated in RMB of investment grade issuers, or in securities of investment grade issuers that do most of their business in the Asia Pacific region, including emerging markets.
Furthermore, the fund invests at least 50% of its assets in securities of issuers with favourable environmental, social, and governance (ESG) characteristics.
The fund (share class A, ACC USD) has been on the market since May 2014, and it has $248 mn AUM*. The top 5 long exporsures by issuer are (CGB) China Govt 2.8% 03/24/29 (24.49%), (SDBC) China Development Bank (8.95%), (EBIUH) Emirates Nbd Bank Pjsc (3.65%), (STANLN) Standard Chartr 4.35% 3/26 RGS (3.44%) and (BACR) Barclays 4% 03/24/24 (3.09%).*
With 77.3% most issurers of the holdings in the portfolio are domiciled in Asia ex Japan ex Australia, followed by the Middle East/Northern Africa (8.8%) and the UK (6.5%).* 63.76% of the fund’s holdings are A-rated, while 13.85% are BBB/Baa-rated.
Fidelity’s China RMB Bond Fund is managed by Morgan Lau, Portfolio Manager with 15 years of investment experience, Taeho Ryu, who brings a portfolio management experience of over 17 years, and Terrence Pang who has an industry experience of more than 10 years.
The fund showed 3.1% returns over the past 12 months (as of 30 November, 2023).
The management fee of the Fidliety fund is 0.75%.* There is a max. initial charge of 3.50%.
Allianz China Strategic Bond
The Allianz China Strategic Bond, the last fund in our list, invests in the People’s Republic of China, Hong Kong, Taiwan and Macau bond markets. A maximum of 30% of the assets may be invested in bonds other than this. The fund furthermore may invest a max. of 100% in High-Yield bonds bearing a typically higher risk and higher potential of gains.
The actively managed fund aims to outperform the benchmark, J.P. Morgan Asia Credit China Index. This fund by Allianz Global Investors was launched in 2011 (share class A), and has total assets under management of 6.57 mn GBP ($8.27 mn)* and is managed by Fixed Income Portfolio Manager Elvis Chan.
There is a entry fee of 3.00% for this Allianz Global Investors fund and the management fee is 0.70%.**
In terms of the geographical profile, the Allianz China Strategic Bond is mainly invested in China (69.79%), followed by Hong Kong (12.94%) and other developed markets (5.00%). The issuers mainly are Emerging Marktes (69.79%), Corporates (17.98%) and Governments (6.99%).*** 55.60% of the funds holdings are BBB rated, 31.80% are A rated.
With 3.27%, the Allianz China Strategic Bond earned the highest annual return of the fund in our list (as of 7 December 2023).
° CNH is the Chinese Yuan traded in the offshore market.
* as of 31 October 2023
** as of 30 September 2022
***as of 30 November 2023
