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With a Gross Domestic Product (GDP) of US$14.28 trillion, China is currently the second-largest economy in the world. It’s also the only major economy to avoid a contraction in 2020, with its annual GDP expanding 2.3%. In comparison, Singapore’s economy contracted 5.4% in 2020, while the U.S. economy contracted 2.3% in 2020. With the rise of China as a global economic power, investing in China is not only an area of growing investor interest, but also one that many investors may not be able to avoid.
While investing in China stocks (especially Chinese technology stocks) is often mentioned, this may not suit every investor’s preference or risk tolerance. Another asset class investors may consider is bonds. While access to China bonds have been difficult in the past due to China’s tight monetary and fiscal control, this has changed in recent times.
For retail investors, one of the simplest ways to access China bonds in Singapore is through NikkoAM-ICBCSG China Bond ETF. This is an ETF listed on 24 November 2020 on the Singapore Exchange (SGX).
If you are considering investing in China bonds, particularly government-backed bonds, here are 5 things you need to know about the NikkoAM-ICBCSG China Bond ETF.
#1 ETF Comprising Bonds Issued By The China Government And China Policy Banks
The NikkoAM-ICBCSG China Bond ETF is an exchange-traded fund (ETF) that tracks the returns of the ChinaBond ICBC 1-10 Year Treasury and Policy Bank Bond Index. It comprises bonds issued by the China government as well as bonds issued by the three policy banks: China Development Bank, the Agricultural Development Bank of China and Export-Import Bank of China.
Source: Nikko AM Asia, 30 June 2021
As of 30 June 2021, the three policy banks take up about 56% of the funds allocated while China Government Bond takes up 42%. The remainder of the ETF portfolio is held as cash and equivalents.
The policy banks have the same credit rating of A+ as the China government and can be considered as quasi-sovereign. They are not state-owned commercial banks, nor do they provide retail, corporate and investment banking services. Instead, the policy banks help channel government-directed spending into strategic areas such as trade, infrastructure and agriculture.
The China Development Bank and Agricultural Development Bank of China are equivalent to the US government’s International Development Finance Corporation (DFC) and India’s National Bank for Agriculture and Rural Development (NABARD). For a local context, the bonds issued by policy banks are similar to the bonds issued by Singapore’s Housing Development Board (HDB) to finance its development programmes.
Currently, the NikkoAM-ICBCSG China Bond ETF enjoys an average credit rating of A+ (as of 30 June 2021). This is on par with other investment grade bonds, such as OCBC Bank which also holds a S&P credit rating of A+.
#2 The Average Yield to Maturity of NikkoAM-ICBCSG China Bond ETF
The NikkoAM-ICBCSG China Bond ETF has a weighted average yield to maturity (YTM) of 3.12% 1 (as of 30 June 2021).
Compared to other sovereign bonds, China has a relatively high positive yield and good credit rating. China’s 10-year government bond yield is 3.17% with a credit rating of A+2 (as of 30 June 2021) while Japan’s 10-year government bond yield is near zero with a similar rating of A+ from S&P. Singapore’s 10-year government bond yield is around 1.4%, with a credit rating of AAA from S&P (as of 9 July 2021).
The YTM1 of the NikkoAM-ICBCSG China Bond ETF also gains a boost from the inclusion of policy bank bonds, which are trading at 30 to 50 basis points spread above China government bonds.
#3 Lower Volatility Due To Shorter Weighted Average Duration
The NikkoAM-ICBCSG China Bond ETF has a weighted average duration of 4.08 years (as of 30 June 2021)3.
Source: Nikko AM Asia and CBPC, 30 June 2021. Note: Past performance does not guarantee future returns. Numbers in the graph may not sum to 100% as Cash and/or Derivatives have been excluded. Weighted Average Duration (years) is an average duration weighted with capitalisation, and the figure is for reference only and would vary from time to time due to market onditions. The copyright and intellectual rights to the index displayed above are the sole property of the index provider.
About 32% of the bond holdings will mature in 1 to 3 years. The shorter duration means that the overall fund volatility is lower as it makes the fund portfolio less sensitive to interest rate movements. The closer a bond is to its maturity, the more price certainty and less likely it is to undergo severe price fluctuation.
This makes the NikkoAM-ICBCSG China Bond ETF a good choice to consider for investors who are risk-averse or want to add exposure to a less volatile asset class.
#4 The Only ETF Available To Singapore Investors That Invests In Policy Bank Bonds
Currently, Singapore investors keen to invest in China government bonds have two ETF options: NikkoAM-ICBCSG China Bond ETF and ICBC CSOP FTSE Chinese Government Bond Index ETF.
However, the NikkoAM-ICBCSG China Bond ETF is the only ETF available in Singapore that invests in policy bank bonds. Since policy bank bonds are currently trading at 30 to 50 basis points spread above China government bonds, while having the same credit rating, this means the YTM1 for NikkoAM-ICBCSG China Bond ETF is currently higher than bond ETFs that focuses purely on China government bonds.
This additional yield from the underlying bonds of the ETF has been attributed to the withholding tax and value added tax that foreign investors (including Singapore investors) are exempted from. This exemption is slated to end on 6 November 2021 and is widely expected to be extended. Regardless, the yield (without tax exemption) is expected to be on par or better than yields from China government bonds only.
*Note: Chinese Government Bonds are not eligible for tax exemption.
#5 Total Expense Ratio Of The ETF
The key reasons to investing through an ETF are convenience, diversification and cost-efficiency. Typically, buying bonds through the Over-The-Counter (OTC) markets require a high purchase quantum along with sales charges. Not only that, but gaining diversification can be difficult as the minimum purchase size for OTC bonds can easily be a few hundred thousands, making it inaccessible for most retail investors in Singapore.
NikkoAM-ICBCSG China Bond ETF allows retail investors to participate in the China bond market, which can be hard for an individual investor to access on their own, especially with a smaller quantum. The minimum lot size of 10 units on the SGX also makes this ETF a viable option for dollar-cost averaging. It also does this in a cost-effective manner with a low Total Expense Ratio (TER) of 0.30% p.a. currently.
Read Also: Complete Guide To Investing In Corporate Bonds In Singapore
Singapore investors also have multiple currency options as the ETF is traded in 3 currencies: Renminbi under SGX: ZHY, U.S. dollars under SGX: ZHD and Singapore dollars under SGX: ZHS. However, note that the underlying bonds are traded in Renminbi so regardless of which of the three currencies you choose to invest through, the overall ETF performance is inevitably tied to the Renminbi.
The attractive YTM1 coupled with semi-annual distributions4 also makes the NikkoAM-ICBCSG China Bond ETF – SGD Class an option for fixed income investors. Additionally, the SGD Class of this ETF is eligible under the Supplementary Retirement Scheme (SRS). For Singapore investors looking to gain exposure to the China bond market, the NikkoAM-ICBCSG China Bond ETF is definitely worth consideration.
Notes:
1 Weighted Average Yield to Maturity (%) is an average yield calculated by weighting each security presently held by the Fund at time of calculation with capitalisation and duration. Yield to Maturity and Yield to Call measures are used in the calculation for non-callable and callable bonds respectively. The figure is for reference only and would vary from time to time due to market conditions and it does not represent the Fund’s distribution yield or actual rate of return.
2 The credit ratings of the underlying fixed income securities are determined by S&P or Moody’s, and where official credit ratings are unavailable, Nikko AM Asia’s internal credit ratings are used.
3 Weighted Average Duration (years) is an average duration weighted with capitalisation, and the figure is for reference only and would vary from time to time due to market conditions.)
4 Distributions are not guaranteed and are at the absolute discretion of the Manager. Any distribution is expected to result in an immediate reduction of Fund’s NAV. Distributions may be paid out of capital which will result in capital erosion and the reduction in the Fund’s NAV, which will be reflected in the redemption price of the Units.
Important Information:
The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be delisted from the SGX-ST. Transaction in units of the ETF will result in brokerage commissions. Listing of the units does not guarantee a liquid market for the units. Units of the ETF may be bought or sold throughout trading hours of the SGX-ST through any brokerage account. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units. Investors may only redeem the units with Nikko AM Asia under certain specified conditions.
This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).
Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.
The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.
The ChinaBond ICBC 1-10 Year Treasury and Policy Bank Bond Index is constructed and calculated by ChinaBond Pricing Center Co., Ltd. All intellectual property rights and other interests in the index value and constituent list belong to ChinaBond Pricing Center Co., Ltd. ChinaBond Pricing Center Co., Ltd. does not make any express or implied warranty on the accuracy, completeness or timeliness of Index-related information, or on the conclusions that the data recipient may reach.
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