GF Fund Management Co. is expanding its range of exchange-traded funds that invest in China's $9-trillion bond and stock markets to meet rising global demand.
"We're very interested in the U.S. ETF market, and are talking with our partners to list more ETF products there, including A-shares," said Nathan Lin, chief executive officer of unit GF International Investment Management Ltd., referring to stocks listed in China.
The Hong Kong-based asset manager has allocated 1-billion yuan ($162.6-million U.S.) of its quota under the Renminbi Qualified Foreign Institutional Investor program to the $50-million Global X GF China Bond ETF, which was the first such fund to access China's interbank bond market. The fund is looking to fill the rest of the quota in the first quarter of 2015 and then apply for more, said Lin. RQFII allows yuan raised offshore to be invested in China's domestic securities.
Bonds and equities in the world's largest emerging market are heading for the biggest annual gains since at least 2009 as China opens up its capital markets to global investors. The central bank cut interest rates last month for the first time since 2012 and HSBC Holdings Plc and Barclays Plc predict there will be another two reductions to support the economy before the middle of next year. Economists predict this year's growth will be the slowest in more than two decades at 7.4 per cent.
"The turning point for the economy may not come soon, but policy-wise, the worst has been left behind," Lin said in a phone interview yesterday. The expectation of relatively loose monetary environment and government support for the economy will be supportive for bonds and stocks, he added.
The ChinaBond Composite Total Return Index, which tracks both sovereign and corporate debt, gained 11 per cent this year and is set for the biggest annual advance since 2008, while the Shanghai Composite Index jumped 31 per cent, the most since 2009. The interbank market accounts for more than 90 per cent of outstanding bonds by value, ChinaBond data show.
The Global X GF China Bond ETF that listed in the U.S. on Nov. 19 tracks the S&P China Composite Select Bond Index, which has 45 per cent allocated to central state-owned companies' debt, 23 per cent in sovereign notes and 32 per cent in quasi-sovereign bonds. It was the second such product in the U.S., after Van Eck Global and China Asset Management Co. started an ETF investing in onshore exchange-traded bonds on Nov. 11, which has attracted $19.8-million.
"It offers higher yields, and good diversification opportunity as historically China's onshore bond market has a very low correlation with global markets," Lin said. At the same time "pricing on the interbank bond market is more efficient, given its volume and depth," he said.
Money managers have now registered almost 40 ETFs tracking China's shares and debt with U.S. regulators. The $646-million Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the largest in the U.S., closed 5.3 per cent above the value of its holdings on Nov. 26, marking a record premium to its underlying assets.
GF International is also studying the possibility of listing products in other markets, including Hong Kong and London, as it plans to set up a unit in London and an office in New York, according to Lin.