Don’t miss “The biggest bull market in government bonds”

China is one of the few countries globally that is practicing a monetary easing policy as much of the world tightens up in the fight against inflation. It has opened the window for investment opportunities in China that advisors may currently overlook, particularly within bonds.

Brendan Ahern, CIO of KraneShares, recently appeared on an episode of the Animal Spirits podcast “Talk Your Book: Investing in China” hosted by Michael Batnick, CFA and managing partner of Ritholtz Wealth Management, and Ben Carlson, CFA, director, institutional asset management at Ritholtz Wealth Management, to discuss China’s markets, policies and performance.

Foreign investment in China dropped significantly last year as the world’s second largest economy by nominal GDP embarked on sweeping reforms and regulations that spanned sectors, with a strong focus on the tech sector. The tech sector in China, as in the United States, is home to some of the largest and growing companies, but a steady pounding of reforms by the Chinese government that began last summer has caused an exponential rise in regulatory risk to the industry and pushed a part of the foreign investors on the sidelines.

Regulatory risk is believed to have come to an end, Ahern believes, and the government has shifted to a policy of easing and monetary support as the government battles a slowing economy. The perception of risk, however, coupled with the geopolitical events surrounding Russia, has led to a schism in how the Western world views China versus perception within its borders.

Ahern explained that there is “this disparity between what foreigners think of China and what people in China think of China, and the Chinese are historically far less pessimistic. And it’s not that they don’t have access to Western media, which is this kind of constant negative media barrage is more, they just don’t believe it, they would say that the things that really matter are government policy ”.

The real estate sector struggles with timely government aid

The collapse of real estate development giant Evergrande last year continues to have ripple effects on China’s real estate sector and has prompted targeted support from the government to ensure that partially completed and months-abandoned construction projects are completed. Chinese central bank real estate support is part of the broader economic support happening across the economy as the government seeks to add stimulus to an economy that is still battling the impacts of COVID.

“China is in a cycle of easing. They cut the primary loan rate. They cut the intra-bank lending rate. They are easing because they recognize that the economy needs support and this is a big plus for investors, ”Ahern explained.

“Also, for investors in China, as interest rates go down, the biggest bull market in government bonds right now is in China,” Ahern said. “Chinese treasuries have risen quite significantly as they ease.”

Capturing the bull market in Chinese Treasuries

the KraneShares Bloomberg China Bond Inclusion Index ETF (KBND) invests in high quality treasury and corporate bonds within China, which could be an area with attractive returns relative to much of the world. The fund aims to track the Bloomberg China Inclusion Focused Bond Index and offers monthly distributions.

The index is rebalancing weighted so that renminbi bonds issued by the People’s Republic of China make up 25% of the weight, renminbi bonds of policy banks make up another 25%, and renminbi bonds of companies and other government entities make up the remaining 50%. Individual issuers have a maximum representation limit of 9% and all corporate bonds must have a Fitch, Moody’s or Standard and Poor’s rating of BBB-, Baa3 or BBB- or higher.

The index excludes unrated RMB corporate bonds, floating rate and zero coupon bonds, bonds with equity characteristics such as convertible bonds, derivatives, structured products, securitized bonds, private placements, retail bonds, inflation-linked bonds, Shanghai or Shenzhen Stock Exchanges, bonds classified as “financial institutions” or special bonds issued by the PRC or the Ministry of Finance.

KBND has an expense ratio of 0.48% with a fee waiver that expires on August 1, 2023.

For more news, information and strategies, visit the China Insights Channel.

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