Chinese bond ETFs top US$50 billion in assets managed in frenzy spurred by deflation

South China Morning Post

a day ago

Chinese investors are snapping up exchange-traded funds (ETFs) that track bonds, betting on their lower costs and diversified exposure to profit from an environment of stubborn deflation and policy support for the corporate sector.
Assets managed under such ETFs surged to more than US$50 billion at the end of June, up from $10 billion at the beginning of last year, according to Bloomberg data. The number of those targeting corporate notes increased sixfold since the end of last year to become the fastest-growing segment, accounting for more than half of all bond ETFs.
The bond ETFs appealed to investors with cheaper costs, potentially higher returns, as well as coveted exposure to some of the country's burgeoning technology firms. They also offered better liquidity and lower default risks than investing directly in corporate debt, with some even eligible to be used as collateral for short-term borrowings.
They have surged in popularity as investors hedged against an uncertain outlook for the Chinese economy, given unresolved trade frictions with the US and persistent deflationary pressures caused by weak consumption. The rapid expansion, which could stoke volatility, was driven by private funds, banks and proprietary desks at brokerages.
'Chinese investors' demand for low-risk, fixed-income assets keeps growing, so bond ETFs became an ideal candidate, given their liquidity advantage and diversified holdings,' said Rachel Sun, director of China manager research at Morningstar (Shenzhen). 'Market expansion and product innovation have provided a rich pool of underlying assets.'
While China's central bank has vowed to keep monetary conditions loose, it has also repeatedly warned about risks from excessive bond rallies. With yields already near record lows, government debt was considered a crowded and less rewarding trade.
In comparison, fixed-income ETFs offer investors not only capital gains but also access to higher-yielding corporate notes, which have expanded their presence in the product's underlying asset mix.