Index Change For China Bonds Could Boost These ETFs

When it comes to China's mainland financial markets, it is A-shares equities, the stocks trading in Shanghai and Shenzhen, that capture the most attention. In recent years, plenty of that attention has been devoted to when major index providers will add A-shares to major emerging markets benchmarks.

On a related note, China's onshore bond market should be getting some more attention as J.P. Morgan considers adding Chinese onshore bonds to a major emerging markets bond index.

“The review, which JPMorgan announced in a March 15 report, follows the People’s Bank of China’s statement last month that most types of overseas financial institutions will no longer need quotas to invest in the interbank bond market, which accounts for the bulk of debt in the nation,” according to Bloomberg. 

If it moves forward the addition, the bank would add Chinese onshore bonds to the JPMorgan’s GBI-EM Global Diversified Index, Bloomberg reports. However, U.S. investors do not need to wait to access China's onshore corporate and government debt markets. In 2014, several issuers of exchange traded funds brought China's onshore bond markets to the U.S.

For example, investors can access Chinese bonds issued by sovereign, quasi-sovereign and corporate issuers via the KraneShares E Fund China Commercial Paper ETF KCNY. KCNY only holds investment-grade commercial paper.

KCNY's underlying index considers “investment grade commercial paper is commercial paper that is issued by an issuer whose long-term bonds are rated AAA or equivalent by one or more Chinese credit rating agencies; or commercial paper that is issued by an issuer whose long-term bonds are rated AA+ or equivalent by one or more Chinese credit rating agencies and commercial paper is rated A-1 or equivalent by one or more Chinese credit rating agencies,” according to KraneShares. 

Framed as a money market-type fund, KCNY does better than what investors would find at a bank with 30-day SEC yield of 2.2 percent.

“Key issues under consideration include whether foreigners can bypass currency repatriation restrictions and the Chinese government’s definition of medium and long-term investors, according to the report,” reports Bloomberg.

Increased attention on China's onshore bond market could also have investors examining the Market Vectors ChinaAMC China Bond ETF CBON and the Global X GF Bond ETF CHNB. The Global X offering holds government and agency debt.

CBON holds 23 bonds and has a 30-day SEC yield of just under two percent. Market Vectors notes China's onshore bond market has grown by an average of 18 percent over the past decade.