CBON invests in AAA-rated Chinese government and corporate bonds

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(This article was co-produced with Hoya Capital Real Estate)

Introduction

Want to invest in government and the highest rated companies in the world’s second largest economy? Do you trust them to honor their debts and that the Renminbi retain its value against your national currency? If you answered yes to both questions, then the VanEck Vectors ChinaAMC China Bond ETF (NYSEARCA: CBON) should be in your search list. My goal here is not to convince you to buy CBON, but to provide enough information about the ETF so that readers have enough starting data to decide if further due diligence is warranted.

I am not a buyer of this ETF as I cannot in good conscience answer Yes to the two questions I asked.

VanEck Vectors ChinaAMC China Bond ETF Review

Seeking Alpha describes this ETF as follows:

VanEck China Bond ETF is managed by Van Eck Associates and co-managed by China Asset Management (Hong Kong) Limited. The fund invests in Chinese bond markets. The fund invests primarily in renminbi-denominated fixed rate bonds issued by credit, government or quasi-government issuers and are rated AAA. It seeks to replicate the performance of the ChinaBond China High Quality Bond Index. The CBON ETF was created on November 10, 2014.

Source: seekalpha.com CBON

CBON has $120 million in assets and offers investors a yield of 3.3%. Managers capped fees through Aug. 22 at 50 basis points; after which they will be 68bps. Van Eck lists three reasons to own his ETF:

  • Performance bonus : Attractive recovery in yield versus developed market bonds
  • Portfolio Diversifier: RMB-denominated bonds have historically exhibited low correlation to other asset classes
  • Access to the world’s second largest bond market: Large exposure to bonds issued by central government, strategic banks and corporates

Source: vaneck.com CBON

Index overview

Since CBON invests based on an index, let’s start with our understanding of this ETF. I found this data on the index:

The ChinaBond High Quality Chinese Bond Index invests in renminbi (“RMB”) denominated fixed rate bonds issued in the People’s Republic of China (“China” or “PRC”) by Chinese credit, governmental or quasi-governmental issuers (e.g. strategic banks) ( “RMB bonds”). Chinese credit issuers are generally considered to be issuers of central corporate bonds, local corporate bonds, medium-term notes, corporate bonds and railway debt Credit RMB bonds must have at least a AAA rating by one of the Chinese local rating agencies recognized by the relevant authorities of the PRC to be included in the Index.

Index Weighting: Index constituents are based on the relative market capitalization of each constituent to the total market capitalization, subject to the following criteria: 20% government bonds; 30% political bank bonds; and 50% corporate bonds (with an issue cap of 4.75%).

Source: index vaneck.com

Other important index factors include:

  • Over 3400 issues with monthly rebalancing
  • Yield to maturity: 3.31%
  • Modified duration: 4.28 years
  • Average maturity: 5.37 years
  • Sector allocations

CBON ETF Sector Weightings

vaneck.com CBON Index

Current Chinese yield curves for government bonds and AAA bonds look like this:

ChinaBond Yield Curve

yield.chinabond.com.cn

CBON Holdings Review

According to the latest data available, VanEck reported these statistics for CBON:

  • Yield to maturity: 2.89%
  • Modified duration: 4.54 years
  • Average maturity: 5.15 years
  • Sector breakdown

Review of holdings in CBON

vaneck.com CBON Holdings

Based on the rules, it appears that CBON should have sold financial bonds at the end of April, as the ETF weighting far exceeded the index weighting. At the end of May, the top 20 holdings were:

VanEck China Bond ETF holdings

vaneck.com CBON Holdings

Although the index has over 3,400 issues, CBON only holds 100. These represent 44% of the portfolio. All assets held are denominated in CNY, except for the 6% cash, which is in USD. I calculated the WAC to be 3.66%. I also calculated a much longer WAM (11 years). The number reported by CBON is closer to an unweighted value and a footnote seems to confirm this.

CBON Distribution Review

CBON distribution

searchalpha.com DVD CBON

With over 40% of bonds maturing within three years, we expect CBON to see its average coupon increase and investors to start receiving more income.

Performance review

CBON Performance Review
Data by YCharts

Like most fixed income funds, 2022 hasn’t started well. It will take some time to see if the recent low will hold.

China Bond ETF Returns

vaneck.com Returns CBON

Using such a small subset of the benchmark, CBON failed to match the performance of the benchmark except for the 3 months ending April.

Portfolio strategy

Fear over the country’s indebted real estate sector appears to have left demand for Chinese bonds untouched. As the government cuts its benchmark mortgage rates once and further cuts are expected to follow, at the same time as the Federal Reserve tightens, this should weaken the yuan against the USD. Since all of CBON’s assets are denominated in Renminbi, its relationship to USD, or the investor’s base currency, becomes important.

USD to CNY Chart
Data by YCharts

The People’s Bank of China (PBoC) plays a major role in trying to control the value of the yuan against the US dollar. If the Chinese currency appreciates significantly against the US dollar, it is more difficult for Chinese companies to export. Despite this, this article describes the measures taken at the end of April by the PBoC to strengthen the yuan. For CBON ETF investors, a weakening of the yuan will reduce the absolute return. Conversely, a currency appreciation will further increase the returns of holding this ETF. I found one article listing the expected exchange rates until 2026, with fluctuations between 5.9 and 6.7 Yuan/USD.

Other options

For investors who want exposure to, but not exclusively, China, there are other ETFs they can consider. The KraneShares Asia Pacific High Income Bond ETF (KHYB) has a weight of 37% in China, while its compatriot VanEck Vectors International High Yield Bond ETF (IHY) is only 5%; many are even less exposed. Also included is the iShares Interest Rate Hedged Emerging Markets Bond ETF (EMBH), which eliminates currency risk.

https://seekingalpha.com/author/hoya-capital/research

Hoya Capital Real Estate

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