China is one of the few countries in the world that practices monetary easing, while most countries in the world are strict in fighting inflation. It has opened a window of investment opportunities within China that advisors may currently overlook, particularly in bonds.
Brendan Ahern, CIO of KraneShares, recently appeared on an episode of the Animal Spirits podcast titled “Talk Your Book: Investing in China” hosted by Michael Batnick, CFA and Managing Partner at Ritholtz Wealth Management, and Ben Carlson, CFA, Institutional Asset Manager at Ritholtz Wealth Management to discuss China’s markets, policy, and performance.
Foreign investment in China fell dramatically last year as the world’s second-largest economy by nominal GDP embarked on sweeping reforms and sector-wide regulations, with a heavy focus on the technology sector. The tech sector in China, as in the United States, is home to some of the largest and most growing companies, but the Chinese government’s ongoing reforms that began last summer have caused regulatory risks to rise dramatically for the sector and pushed a portion of foreign investors to the sidelines.
Ahern believes that these regulatory risks have come to an end, and the government has turned to monetary easing and support as the government battles a slowing economy. However, the perception of risk, along with the geopolitical events surrounding Russia, has led to a split in how the Western world views China versus the perception within its borders.
Ahern explained that “there is this discrepancy between what foreigners think about China and what people in China think about China, and the Chinese are historically much less pessimistic. And it’s not that they don’t have access to Western media, which is this kind of constant negative media barrage. It’s more than That, they are not convinced of, they will say that the really important things are the policy of the government.”
Real estate sector struggles with immediate government aid
The collapse of real estate giant Evergrande last year continues to have a ripple effect on China’s real estate sector, and has led to government-directed support to ensure that partially completed construction projects that have been abandoned for months are completed. The real estate support from China’s central banks is part of the larger economic support taking place across the economy as the government looks to add stimulus to an economy still battling the effects of COVID.
“China is in a cycle of easing. They’ve lowered the key loan rate. They’ve lowered the lending rate within the banks. They’re easing because they know the economy needs support, and that’s a big wind for investors,” Ahern explained.
“For investors in China as well, with interest rates low, the largest bull market in government treasury bonds globally is now in China,” Ahern said. “Chinese treasury bonds rose significantly with their calm.”
Acquisition of the Chinese treasury bond bull market
The Crane Shares Bloomberg China Bond Listing Index (KBND) It invests in high quality Treasury and corporate bonds within China which can be an attractive yield area compared to most countries in the world. The fund seeks to track the Bloomberg China Bond Index focused on inclusion and offers monthly distributions.
The index is weighted upon rebalancing so that renminbi bonds issued by the People’s Republic of China make up 25% of the weighting, renminbi bonds from policy banks make up another 25%, and renminbi bonds from corporate and other government entities make up the remaining 50%. A maximum representation of individual issuers is set at 9%, and all corporate bonds must have a rating from Fitch, Moody’s or Standard & Poor’s at BBB-, Baa3, BBB- or higher.
The index excludes corporate bonds not denominated in renminbi, floating rate and zero coupon notes, and bonds that contain equity features such as convertible bonds, derivatives, structured products, securitized bonds, private placements, retail bonds, inflation-linked bonds, and bonds from Shanghai or exchanges. Shenzhen, bonds classified as “financial institutions”, or special bonds issued by the People’s Republic of China or the Ministry of Finance.
The KBND has an expense ratio of 0.48% with a fee waiver expiring August 1, 2023.
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