The extravagantly named PowerShares Chinese Yuan Dim Sum Bond Portfolio reflects the popularity of dim sum in Hong Kong, where such bonds are generally issued, according to Joseph Becker, fixed income product strategy manager at Invesco PowerShares.
Becker adds that there’s massive demand outside China to be a part of what many investors see as the appreciation potential of the yuan over time. Many investors believe that the currency is being depressed to boost exports and that there’s some consensus that it’s going to keep getting stronger — and they want a way to participate. “There’s growing investor interest in yuan-denominated bonds,” Becker says.
Presidents George W. Bush and Barack Obama have both held talks at various times with the Beijing government to let the Chinese currency float and not be pegged to the dollar, and since 2005 the Chinese government has begun an easing — even recently indicating that by 2015 it will freely float and achieve “full convertibility.”
“The demand is there — just look at the offshore market for yuan-denominated bonds,” Becker says. “People outside China were constrained in their ability to hold yuan-denominated RMB — renminbi — and as this has eased, demand has soared.”
In 2007, Chinese state-owned banks made yuan-denominated bonds available outside China. In 2009, the offshore market—foreign investors—could buy and hold yuan bonds. “And in July 2010 most restrictions were lifted—the market underwent deregulation. You have only to look at the pace of issuance and how it’s risen since then.”
And now Invesco PowerShares looks at a market whose size and scale makes sense to issue a product, Becker continues. The PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM) is based on the Citigroup Dim Sum (Offshore CNY) Bond Index, which measures the performance of Chinese yuan-denominated Dim Sum bonds, including fixed-rate securities issued by governments, agencies, supranationals and corporations with a minimum maturity of one year and minimum size of 1 billion yuan. The index is reconstituted on a monthly basis. “Citigroup handles the research and is active in trading the bonds,” he says. The bonds are primarily traded in Hong Kong.
The fund is expected to normally invest in at least 90 percent of its total assets in the Chinese yuan-denominated bonds that comprise the index.
The bonds in the index generally have fixed-rate coupons with no zeros and a minimum maturity of one year. As of the end of August, the index consisted of 52.6 percent investment grade bonds as determined by Standard & Poor’s, with the remainder high-yield, 5 to 6 percent or not rated — 42 percent — debt.
Listed just one day sooner than the PowerShares’ ETF is the Guggenheim (RMB) ETF, based on an index that is 75 percent investment grade, with half of the securities not rated.
The expense ratio for the PowerShares ETF is 0.45 percent and is expected to issue monthly distributions. The Guggenheim’s expense ratio is 0.65 percent. Also targeted is a duration of three-and-a-half years or less, with a minimum maturity of one year. “The PowerShares duration is currently 3.07, a bit shorter in maturity than the target duration of the Guggenheim ETF,” Becker says. “Most of these bonds are issued with 3 to 3-1/2 year maturities.”
Guggenheim assigns weights to certain sectors—22-1/2 percent to China government bond sector, for example, whereas PowerShares believes it’s too early in the game to be assigning constraints, Becker notes.
Proving that there indeed is increased demand, yet another well-known ETF provider joined the fray in early October: Rydex with its CurrencyShares Chinese Renminbi Trust, offering exposure to the official currency of China. Rydex holds the general expectation that the currency will appreciate against the dollar and other currencies in the future and sees its ETF as offering investors an opportunity to take part in the currency’s movement.
Among other firms jumping into the currency/bond waters are Van Eck Global, Wisdom Tree and ETSpreads. All these products also are riding on the low correlation to U.S. bonds and other developed market debt.
Among downsides are the Chinese government’s currency controls, which can impact the value of yuan-denominated securities, as well as their availability, liquidity and pricing. In addition, the fund’s net asset value is determined in U.S. dollars, so it could decline if the yuan depreciates against the U.S. dollar—not much expected but possible.
The upside is having low-cost access to the yuan-denominated bond market. The ETF launched in late September and traded at $23 on October 11.
Guggenheim Investments points out that the Dim Sum bond market provides entry to an investment landscape in one of the world’s fastest-growing economies. It is based on the AlphaShares LLC China Yuan Bond Index, a rules-based index comprised, as of the end of August, of about 37 securities. At least 80 percent of the fund’s total assets come from fixed-income securities that make up the index. The Guggenheim Yuan Bond ETF traded at $25 as of October 11.
