Concerns about the health of the Chinese economy have cropped
up again after being pushed to the back burner for a while during
the second half of 2013. Weaker-than-expected industrial
production numbers, soft retail sales and exports are some of the
signs of slowdown in the world's second largest economy.
Moreover, the government's growth target of 7.5% this year would
be the slowest since 1990 (read:
China ETFs Slump on Terrible Export Numbers
Along with the sluggish economy, the Chinese bond market is
witnessing slower growth after almost a decade. In the past ten
years, the number of new issues rose by almost
. Sales outside of auctions slipped 10% to 3.77 trillion yuan in
2013, after rising 56% in 2012 and 48% in 2011, according to a
Among other factors, the increasing number of defaults in the
nation's bond market is believed to be the primary cause for the
current debacle in the Chinese bond market (read:
Inside the Recent China A Shares ETF Slump
Most recently, a Chinese developer, Zhejiang Xingrun Real
Estate Co., collapsed with 3.5 billion yuan of outstanding debt.
This collapse comes less than two weeks after Shanghai Chaori
Energy Science & Technology Co. became the first onshore bond
issuer to default in Chinese history.
The recent default is more severe and is expected to be a big
dampener to the country's booming property market. Zhejiang is in
fact China's largest property developer.
Earlier, bonds and most credit products were considered almost
"riskless" as they were thought to be backed by the government
and state-owned banks in case of a default. China had managed to
avert a high profile default of an investment product ahead of
their New Year.
China's bond market has been a significant fund-raising source
for the nation's small and mid-sized companies. This market came
into prominence ever since the Chinese banks tightened their
lending policies in the wake of the 2008 global financial crisis.
Bank credit is only available to large enterprises.
However, the rising number of defaults has shaken investor
confidence in the Chinese bond market and consequently new bond
issues have begun to slump. The
Chinese onshore bond market is expected to face more credit risk
as businesses default on their payments and the economy slows
down further. A higher number of defaults are expected to push
corporate financing costs higher cover credit risks.
This situation has also hit the ETFs catering to the Chinese
bond market. These products are all trading in the red in the
year-to-date time frame. Below, we have highlighted two Chinese
bond ETFs in greater detail that might face volatile trading
all the Emerging Market Bond ETFs here
Chinese Yuan Dim Sum Bond Portfolio (
Though the fund delivered a modest return of 2.57% in 2013,
DSUM has lost around 3.39% in the past one month and is down
2.94% since the start of the year.
DSUM manages an asset base of $207.8 million and seeks to
provide exposure to Chinese Renminbi (RMB)-denominated bonds. The
fund tracks the performance of the Citi Custom Dim Sum (Offshore
CNY) Bond Index.
The index holds RMB-denominated bonds issued by governments,
agencies, supranationals and corporations, excluding synthetics,
convertible bonds, retail bonds and CDs. As such, the fund holds
122 Chinese bonds which are quite well diversified.
Investors should also note that roughly 36% of the fund is rated
at least 'A' by S&P while another 45% isn't rated at all
3 Emerging Market ETFs Off to a Great Start in
Market Vectors Renminbi Bond ETF
CHLC tracks the Market Vectors Renminbi Bond Index (MVCHLC) and
manages a small asset base of $5.16 million. This benchmark looks
to give exposure to Chinese Renminbi-denominated bonds that are
investable to market participants outside Mainland China
Unlike DSUM, CHLC holds a small basket of 23 bonds and is
somewhat concentrated in its top 5 holdings. The top holding -
Germany's Bosch - alone has 9.5% allocation in the fund.
Also, the fund has more global exposure compared to DSUM, as it
invests 63.1% in China. Germany, Malaysia and the U.K. are some
of the other countries having exposure in the fund.
CHLC has lost 1.39% in the past one month, after returning a
modest 2.09% in 2013.
The recent defaults are defeating China's very intention of
expanding the size of its bond market. Chinese policymakers
intend to boost direct financing such as bonds and stocks. If the
number of defaults continues, investors would probably be less
interested in funding these high-risk notes and thus the
aforementioned ETFs might see more volatility in the weeks
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MKT VEC-RENM BD (CHLC): ETF Research Reports
PWRSH-CHIN YUAN (DSUM): ETF Research Reports
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