The China Bond Fund aims to get the highest total return possible. The Fund invests at least 70% of its total assets in fixed income transferable securities denominated in Renminbi or other non-Chinese domestic currencies issued by entities that conduct the majority of their business in the PRC through recognized mechanisms such as the Chinese Interbank Bond Market, the on-exchange bond market, the quota system, and/or onshore or offshore issuances, as well as any future developed channels. The Fund is an RQFII Access Fund and a CIBM Fund, and it may invest in the PRC via RQFII Quota and in the CIBM via the Foreign Access Regime, Bond Connect, and/or other ways as permitted by applicable rules from time to time.
The Fund may invest in debt instruments that are exposed to a rating downgrade, either real or imagined. An increase in interest rates may have a negative impact on the Fund’s bond holdings. The Fund may invest in non-investment grade and unrated bonds, which are more likely to default, have higher volatility, and have lower liquidity. The Fund invests in government or government-backed bonds, which may be subject to political, economic, default, or other risks. The Fund may invest in Chinese local government finance vehicles’ urban investment bonds ( “LGFVs”) that are susceptible to the LGFVs’ default risk.
The Fund is subject to the Renminbi Qualified Foreign Institutional Investor (RQFII) limits and requirements “Due to quota limitations and regulatory uncertainty, RQFII”) investments may have a negative impact on the fund’s value. The Fund is exposed to the risks of investing in China’s interbank bond market.
The Fund’s holdings are primarily in the People’s Republic of China (PRC). This could lead to higher volatility than more broadly based investments. Political, fiscal, economic, social, and foreign exchange risks may be associated with the Fund’s investments in emerging markets.
Tax risks, currency risks, securities lending counterparty risks, foreign investment limitations risks, currency control/conversion risks, and currency hedging risks all affect the Fund.
At the discretion of the Board of Directors, Class 6 Shares pay dividends gross of expenditures and/or from capital. Paying dividends before expenses may result in more income available for distribution; however, these shares may effectively pay dividends from capital, which could result in a partial return or withdrawal of an investor’s initial investment or capital gains. On the ex-dividend date, all issued dividends result in an immediate fall in the NAV price of the share class.
Derivatives may be used by the Fund for hedging and investment reasons. However, it will not be widely used for investment objectives. The Fund’s use of derivatives may result in losses.
The Fund’s value is volatile, and it can drop dramatically in a short period of time. It’s possible that you’ll lose a portion of your money.
Investors should not base their investing decisions solely on the contents of this booklet. For more information, including risk concerns, investors should consult the Product Highlights Sheet (for Singapore).
3As of the end of April 2020, Morningstar. Morningstar categorizes Hong Kong Securities and Futures Commission (SFC) licensed funds in Asia Bonds as a peer group. Authorization by the SFC does not imply official endorsement. 11 November 2011 was the first day of operation.
Is it wise to invest in Chinese bonds?
“In fact, Chinese government bonds (CGBs) have recently outperformed some of the other government bonds. While everyone else is facing inflationary pressures, it may be a good opportunity to buy in CGBs if you have no exposure,” Chow added.
Are Chinese government bonds available for purchase?
Most developed-market government bonds have a greater yield than onshore RMB Chinese government bonds (CGBs) (see Exhibit 9). As a result, CGBs can provide investors strong credit quality as well as appealing extra rates.
Are foreigners allowed to purchase Chinese bonds?
Through the dollar-denominated Qualified Foreign Institutional Investor (QFII) and its yuan-denominated twin, RQFII, foreign institutional investors can gain access to China’s two main bond markets, the exchange bond and interbank markets.
In June, China abolished quotas for QFII and RQFII, allowing qualified foreign institutions to invest in Chinese stocks and bonds without restriction.
Through China Interbank Market (CIBM) Direct, some institutional investors, such as foreign central banks and monetary authorities, as well as sovereign wealth funds, can register for direct access to the interbank market.
Which Chinese bond market is the most developed?
The Chinese onshore local currency bond market is the largest. These are renminbi-denominated bonds issued in mainland China. This is the largest of the three submarkets, with a total value of $17.5 trillion. The majority of Chinese government and policy bank bonds are issued in renminbi on the mainland.
Are Chinese government bonds safe?
‘Higher Quality Growth’ is a phrase used to describe growth that is of higher quality. As the world’s second-largest bond market, Chinese debt serves as a “alternative safe haven” for Tracy Chen, a Philadelphia-based portfolio manager at Brandywine Global who purchased Chinese debt for the first time in 2020.
What exactly are Chinese bonds?
The prolonged use of capital controls is incompatible with the goal of achieving reserve currency status in the long run, but we do not see a shift away from a controlled exchange rate in the near future.
Relative Value
Chinese bonds may have a greater yield than equivalent bonds issued in industrialized bond markets, but not when compared to the average emerging market. When compared to the average emerging market, this indicates the comparatively low volatility of both bond prices and currency.
Both the central bank and the State Council, which oversees China’s huge bureaucracy, have expressed support for a more moderate monetary policy. This, we feel, marks the start of a longer period of reduced interest rates, which might be beneficial to bonds.
However, in the medium and long run, China’s growth is anticipated to outstrip that of the United States and Europe, necessitating fundamentally higher Chinese interest rates to combat inflationary pressures. It should be noted, however, that China’s economic and interest rate cycles do not usually follow those of the United States and Europe. This explains why the US and European markets have such poor connection.
Chinese 10-year government bonds will pay out roughly 3.6 percent to investors, while 10-year policy bank bonds will pay out around 4.3 percent.
5 On 10-year sovereign paper issued by governments in developed markets, that’s an appealing yield increase.
What is the size of China’s bond market?
The Chinese economy is a behemoth, and its bond market is a rising powerhouse. The Chinese bond market was the world’s second-largest by the end of 2020. Chinese bonds were worth approximately $19 trillion in total, accounting for 15% of the global bond market.
What are offshore Chinese bonds?
Simply described, China offshore bonds are dollar-denominated bonds issued by a HoldCo in the Cayman Islands or the British Virgin Islands. These HoldCos have no assets other than shares (common equity) in operational enterprises based in mainland China. These OpCos are the ones who actually hold the company’s assets and conduct operations.
As a result, any debt issued at the OpCo level is fundamentally subservient to the holders of HoldCo bonds. And, as you might think, OpCos do issue debt. They issue debt in the form of onshore bonds, secured loans, and all other types of unsecured claims that any firm will accumulate as a result of its usual operations (all of this onshore debt is obviously RMB-denominated, not dollar-denominated).
Note: If you’re not sure what the difference between HoldCo and OpCo is, see this post on structural subordination.
I’ve built together a tiny diagram to show you where onshore vs. offshore debt is located:
Note: The funds needed to repay HoldCo coupon holders originate from dividends paid by OpCos, which are subsequently passed on to the HoldCo. Alternatively, an intracompany loan, rather being an equity investment by HoldCo into OpCo, is often used to establish a connection between the HoldCo and the OpCo, in which the HoldCo passes on bond proceeds and the OpCo passes back up proceeds for coupon payments.
Remember that, other things being equal, you want to be closer to the assets as a creditor. However, with offshore debt, you’re as far removed from the OpCo’s actual assets as you can get because you’re dealing with a HoldCo based in a different nation and unable to obtain true upstream guarantees as they’re commonly understood and applied.
If you’ve read the Restructuring Guides, you might be asking what exactly prevents the offshore bonds from being primed (having lots of onshore debt being issued, which will have a higher priority than the HoldCo debt).
It’s an excellent question! “The credit papers say there will be some type of constraint on the amount of onshore debt that will be raised,” says the hand-wavy response.
While I’m trying to keep this piece short and sweet, if you’re dealing with a restructure in the United States, you’ll hear the term “basket capacity” a lot. All this entails is determining how much extra money can be allocated to a specific level of priority based on the existing credit documents.
This is a black-and-white regulation. If the debtor can only raise $100 million in secured debt, a series of adjustments to current credit documents (which creditors are unlikely to agree to) will be required to acquire further secured capital.
The point I’m trying to make about offshore bonds is that, while they have similar language to typical credit documents, their practical enforceability is questionable. Because it’s difficult to determine how much debt OpCos have to begin with (for example, private construction loans or modest unsecured debt issuances), and because there’s no evident time-tested venue where offshore holders might try to prevent OpCos from raising onshore funds.
While there are legal ways to avoid being primed or having no influence in a reorganization – particularly if the firm has assets in the United States, the United Kingdom, Canada, or elsewhere – the main technique is through a quasi-political influence. Essentially, by persuading the debtor that if they treat offshore holders unfairly, the debtor’s access to the offshore funding market will be cut off for good.
This may appear to be a bad card to play in a restructuring negotiation, but it’s not so bad because most prominent Chinese property developers are heavily reliant on the offshore bond market, as we’ll see below.
What does the Chinese government spend its money on?
High technology, equipment or new material manufacture, service sector, recycling, renewable energy utilization, and environmental protection are all areas where the Chinese government supports investment. Furthermore, China appears to prohibit foreign investment in critical industries where China is attempting to turn domestic enterprises into globally competitive multinational corporations, as well as sectors that have historically benefited from state monopolies or traditions of the state. The government also opposes investments that are made with the intention of profiting from speculation (money, real estate, or assets). The administration also intends to restrict foreign investment in resource-intensive and polluting industries.
The People’s Republic of China’s Law on Foreign Investments, which was passed at the second session of the 13th National People’s Congress on March 15, 2019, has been in effect since January 1, 2020. The revised Foreign Investment Law aims to address frequent concerns raised by foreign companies and governments. The law expressly prevents the government and government officials from forcibly transferring technology, whereas the state encourages technology collaboration based on free will and business standards. Indeed, article 22 states that the state must defend foreign investors’ and foreign-funded firms’ intellectual property rights. Foreign investors can also get the same treatment as domestic investors when applying for licenses (article 30) and participating in public procurement (article 16). Major responsibility for promoting, protecting, and managing foreign investment has been allocated to the appropriate agencies for commerce (Ministry of Commerce) and investment (National Development and Reform Commission).
The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOF) jointly issued two “negative lists” (on Foreign Investment and Special Administrative Measures for Free Trade Zones) and a draft edition of the Catalogue of Encouraged Industries for Foreign Investment on June 23, 2020. The planned 2020 Foreign Investment Encouraged Catalogue has been expanded compared to the 2019 version (complete list in Chinese accessible here), with 125 new businesses added and 76 previously listed industries altered. There are no substantial modifications from the previous year’s catalogue; it invites greater FDI in China’s three key areas: high-end manufacturing, production-oriented service industries, and China’s central, western, and northeastern provinces.