China is one of the few countries in the world to practice monetary policy easing as much of the world tightens to fight inflation. This opened the window for investment opportunities in China that advisers might currently be ignoring, particularly in bonds.

Brendan Ahern, CIO of KraneShares, recently appeared on an episode of the Animal Spirits podcast “Speak Your Book: Investing in Chinahosted by Michael Batnick, CFA and Managing Partner at Ritholtz Wealth Management, and Ben Carlson, CFA, Director, Institutional Asset Management at Ritholtz Wealth Management, to discuss China markets, politics and performance.

Foreign investment in China fell dramatically last year as the world’s second-largest economy by nominal GDP embarked on sweeping reforms and regulations spanning multiple sectors, with a focus on the technology sector. The tech sector in China, like the United States, is home to some of the largest and fastest growing companies, but a steady hammering of Chinese government reforms starting last summer has caused an exponential increase in regulatory risk for the sector and pushed some of the foreign investors away.

That regulatory risk is supposed to have ended, Ahern believes, and the government has shifted to a policy of monetary easing and support while the government battles a slowing economy. The perception of risk, however, coupled with the geopolitical events surrounding Russia, has led to a schism in how the western world views China versus the perception within its borders.

Ahern explained that there is “this disparity between what foreigners think of China and what people in China think of China, and the Chinese are historically much less pessimistic. And it’s not that they don’t have access to Western media, which is this kind of constant negative media barrage; it’s more, they just don’t buy into it, that they would say the things that really matter are government policy.

The real estate sector is fighting for rapid government aid

The collapse of real estate development giant Evergrande last year continues to have ripple effects on China’s real estate sector and has prompted targeted government support to ensure that partially completed construction projects that have been abandoned for months will be completed. . The real estate support from China’s central banks is part of the broader economic support happening across the economy as the government seeks to stimulate an economy still battling the impacts of COVID.

“China is in an easing cycle. They reduced the prime loan rate. They reduced the rate of intra-bank loans. They’re slowing down because they recognize the economy needs support, and that’s a big tailwind for investors,” Ahern explained.

“Also, for investors in China, as interest rates fall, the biggest bull market in treasuries in the world right now is in China,” Ahern said. “Chinese Treasuries have rallied quite significantly as they ease.”

Capturing the Bull Market in Chinese Treasuries

The KraneShares Bloomberg China Bond Inclusion Index ETF (KBND) invests in high-quality treasury bills and corporate bonds in China, which could be a region offering attractive yields compared to much of the world. The fund seeks to track the Bloomberg China Inclusion Focused Bond Index and offers monthly distributions.

The index is weighted during rebalances so that renminbi bonds issued by the People’s Republic of China constitute 25% of the weighting, renminbi bonds of strategic banks constitute an additional 25% and renminbi bonds of corporations and other entities government make up the rest. 50%. Individual issuers are capped at 9% representation and all corporate bonds must have a rating by Fitch, Moody’s or Standard and Poor’s of BBB-, Baa3 or BBB-, or better.

The index excludes unrated RMB corporate bonds, floating rate and zero coupon securities, bonds that have capital characteristics such as convertible bonds, derivatives, structured products, securitized bonds, private placements, retail bonds, inflation-linked bonds, Shanghai bonds or Shenzhen Stock Exchanges, bonds classified as “financial institutions” or special bonds issued by the PRC or the Ministry of Finance.

KBND has an expense ratio of 0.48% with a fee waiver expiring August 1, 2023.

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