Investors flock to China government bond ETFs in search for yield and diversification

CNYB has captured $3.8bn in assets YTD

George Geddes

The Bund skyline at night

A number of China government bond ETFs have captured significant inflows this as a result of attractive yields compared to developed market sovereign bonds and several flagship index inclusions.

Highlighting this, the $4.1bn iShares China CNY Bond UCITS ETF (CNYB) has been the most popular among investors having seen $3.8bn inflows so far this year. 

This is ahead of the Xtrackers Harvest China Government Bond UCITS ETF (CGB), the Goldman Sachs Access China Government Bond UCITS ETF (CBND) and the KraneShares Bloomberg Barclays China Bond Inclusion UCITS ETF (KBND) which have also seen positive flows this year.

Athanasios Psarofagis, ETF analyst and Bloomberg Intelligence, highlighted how well the asset class has done compared to the rest of the market.

“China bond ETFs have a had a pretty good year in terms of flows and the CNYB is in the top five for flows YTD for all products," he said.

Peter Sleep, senior portfolio manager at 7IM, said the flows are mostly being driven by institutional investors.

“Chinese Sovereign and Policy Bank Bonds went into the widely followed Bloomberg Barclays Global Aggregate Bond index last year, the first Chinese bonds to go into that index,” Sleep added.

Following the steps of Bloomberg, FTSE Russell also announced plans to include Chinese government bonds in the FTSE World Government Bond index (WGBI) from October 2021.

The firm said this could result in a further $100bn inflows into the Chinese market as it provides more ways for investors to gain exposure to the asset class.

The breakdown of these institutional investors flocking to the Chinese government bond ETFs is three-fold, according to Sleep.

Next frontier for ETF issuers is China's bond market

The first group of investors is possible global aggregate fund managers who do not have access to the Chinese bond market. Therefore, they must rely on ETFs like CNYB to offer this type of exposure at a low cost from just 0.35%.

Secondly, given the climate of traditional bond markets with a large volume of the developed markets offering negative yields, some investors might be seeking exposure to Chinese bonds for positive yields.

CNYB has a yield of roughly 1.9% which Sleep says is an attractive figure for an investment-grade government bond when much of the market is in negative territory.

Finally, in addition to searching for positive yielding bonds, investors will use products like CNYB for diversification purposes given their reputation.

“Chinese government bonds are rated A by the rating agencies and this is attractive to those who want high-grade bonds,” Sleep concluded.