Don’t Miss “The Biggest Bull Market in Treasuries”

China is one of the few countries in the world practicing a loose monetary policy while much of the world tightens in a fight against inflation. It has opened the window to investment opportunities within China that advisers may currently be overlooking, particularly in bonds.

Brendan Ahern, CIO of KraneShares, recently appeared on an episode of the Animal Spirits podcast “Talk your book: Invest in China” hosted by Michael Batnick, CFA and Managing Partner of Ritholtz Wealth Management, and Ben Carlson, CFA, Director of Institutional Asset Management at Ritholtz Wealth Management, to discuss China markets, politics and performance.

Foreign investment in China fell significantly last year as the world’s second-largest economy by nominal GDP embarked on sweeping reforms and regulations that spanned sectors, with a heavy focus on the tech sector. The tech sector in China, like the US, is home to some of the biggest and fastest growing companies, but a steady hammering of reforms from the Chinese government starting last summer has seen regulatory risk rise exponentially. for the sector and pushed a part of foreign investors to the sidelines.

That regulatory risk is now at an end, Ahern believes, and the government has switched to a policy of easing and monetary support as the government battles a slowing economy. However, the perception of risk, coupled with 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 about China and what people in China think about China, and the Chinese are historically much less pessimistic. And it’s not that they don’t have access to the Western media, which is a kind of constant negative media blitz; What’s more, they just don’t buy it, they would say that the things that really matter are the government’s policies”.

Real Estate Sector Fights For Prompt Government Help

The collapse of property giant Evergrande last year continues to have knock-on effects on China’s property sector and has prompted targeted government support to ensure construction projects partially completed and abandoned for months are completed. The real estate support from China’s central banks is part of the increased economic support happening across the economy as the government looks to add stimulus to an economy still struggling with the impacts of COVID.

“China is in a easing cycle. They cut the prime rate on loans. They have reduced the rate of intra-bank loans. They are relaxing because they recognize that the economy needs support, and that is a huge tailwind for investors,” Ahern explained.

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

Capturing the Bull Market in China Treasuries

the KraneShares Bloomberg China Bond Inclusion Index ETF (KBND) invests in high-quality Treasuries and corporate bonds within China, which could be an attractive yield area 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 according to rebalancings so that renminbi bonds issued by the PRC make up 25% of the weight, renminbi bonds from official banks make up another 25%, and renminbi bonds from corporations and other government entities make up the rest. fifty%. Individual issuers are capped at 9% representation and all corporate bonds must have a Fitch, Moody’s or Standard and Poor’s rating of BBB-, Baa3 or BBB-, or higher.

The index excludes unrated RMB corporate bonds, zero coupon and floating rate securities, bonds that have equity 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 People’s Republic of China or the Ministry of Finance.

KBND has a 0.48% expense ratio with a fee waiver that expires August 1, 2023.

For more news, information and strategy, visit the China Information Channel.

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