Caixin
Dec 10, 2020 04:01 AM
FINANCE

Chinese Fund Companies Submit Applications for Cross-Market Bond ETFs

Since 2018, China’s central bank and securities regulator have taken steps to interconnect the segmented bond markets.
Since 2018, China’s central bank and securities regulator have taken steps to interconnect the segmented bond markets.

A number of fund companies submitted applications for cross-market bond exchange-traded funds (ETFs) to be listed on the Shanghai and Shenzhen stock exchanges, a further step in executing a pilot program China announced in May 2019 to interconnect the country’s segmented $13 trillion bond market.

Bosera Asset Management Co. Ltd., ICBC Credit Suisse Asset Management (International) Co. Ltd., GF Fund Management Co. Ltd., China Universal Asset Management Co. Ltd. and Harfor Fund Management Co. Ltd. applied for bond index mutual funds that can be traded on the stock exchanges or on the interbank market, according to the China Securities and Exchange Commission, which will be in charge of reviewing applications for the ETFs.

The launch of cross-market bond ETFs means that investors can directly exchange their holdings of interbank bonds for ETFs, which will further improve the efficiency of the market and provide investors with more efficient tracking of bond index instruments across all markets, according to analysts at Everbright Securities.

For historical reasons, China’s bond markets have been segmented and regulated by multiple authorities under different rules.

Before 1997, the two stock exchanges were the only legitimate bond markets in China. The Chinese stock market experienced an unprecedented boom in the first half of 1997, fueled by bond repo transactions that allowed investors to use bonds as collateral for borrowings from banks, the proceeds of which were channeled into the stock market.

In May 1997, the central bank, worried about a speculation-driven stock market surge, ordered all commercial banks to switch to a newly established interbank bond market. It has since become the dominant market for bond issuance and trading in China, accounting for 90% of the trading volume of onshore debt.

As a wholesale market, the interbank market is regulated by the National Association of Financial Market Institutional Investors (NAFMII), an industry association under the People’s Bank of China (PBOC), while bonds traded on the two stock exchanges are regulated by the China Securities Regulatory Commission (CSRC). In general, regulations and conditions for exchange-traded bonds are looser compared with the interbank bond market.

Participants in the interbank market are restricted to various qualified institutional investors including commercial banks, mutual funds, insurance companies and securities firms. The participants in the exchange bond market include both institutional players and retail investors.

Since 2018, China’s central bank and securities regulator have taken steps to interconnect the segmented bond markets. In a joint notice in September 2018, the central bank and the CSRC issued guidelines for the ratings business to “promote the interconnection of the bond market and the orderly development of the credit rating industry.”

In May 2019, the CSRC announced the launch of pilot bond index mutual funds that can be traded on stock exchanges or on the interbank market.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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