Within a day of each other, two companies -- Guggenheim Investments and Invesco -- launched new exchange traded funds for Chinese yuan-denominated bonds on the New York Stock Exchange.
Guggenheim launched its Guggenheim Yuan ETF (RMB) Thursday and Invesco unveiled its yuan-denominated PowerShares ETF on Friday.
It is no coincidence that these two competing yuan bond ETFs were launched almost simultaneously.
China has a huge domestic bond market. But those issues -- by the government, state enterprises and Chinese private companies as well as by foreign companies issuing debt in Chinese Renminbi -- have only been available to Chinese citizens, citizens of Hong Kong and so-called “qualified foreign investors.”
But in 2007, China began allowing offshore issuance of internationally tradable securities called Dim Sum bonds. Total issuance of these debt instruments has now reached about $20 billion, and is growing rapidly, with new issuance running at a rate of about $1 billion to $2 billion a month.
As Kevin Carter, co-founder and CEO of AlphaShares, which developed the index for the new Guggenheim ETF, told On Wall Street, “The market has become big enough and liquid enough and there is enough demand for Chinese debt,” that it is understandable that there would now start to be competing ETFs consisting of Chinese bonds.
He says that even so, it took a year to get the Guggenheim ETF ready for listing.
“Over the past year, there were a lot of naysayers, and there were questions about liquidity,” he recalled, “as well as legal issues over whether non-Chinese or Hong Kong investors could buy some bonds.”
He said that what the new ETF -- and others that are likely to join the field -- have going for them is that the Chinese bond market is “the biggest single asset class” that has not been “already picked over” by the ETF industry.
He said the new yuan ETFs offer investors an opportunity to participate in the growth of what is the second-largest economy in the world after the U.S.
Carter said that most currency analysts claim that the Chinese currency in which all these bonds are denominated is undervalued and predicts that the Renminbi will show an average annual appreciation of 4% to 5% over the next few years against the U.S. dollar -- adding substantially to any underlying yield of the bonds in yuan-denominated ETFs,
The Guggenheim ETF is invested in only “high credit quality” Chinese issues, as well as in yuan-denominated issues by non-Chinese companies like Caterpillar and Unilever among others.
Invesco’s yuan-denominated PowerShares ETF, called the PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM), is based on the Citigroup Dim Sum (Offshore CNY) Bond Index which includes yuan-denominated bonds generally issued in Hong Kong by governments, agencies and corporations.
This ETF reportedly includes higher-yielding bonds in its portfolio than the Guggenheim ETF. “The index has no minimum rating requirement,” Joseph Becker, product strategy and research manager at Invesco, said in an interview with On Wall Street.
As the Invesco announcement of its new ETF notes, there are special risks associated with investing in securities designed to provide exposure to Chinese Yuan.
For example: “The Chinese government maintains strict currency controls and regularly intervenes in the currency market. As a result, the value of the yuan, and the value of yuan-denominated securities, may change quickly and arbitrarily, potentially impacting the availability, liquidity, and pricing of securities designed to provide offshore investors with exposure to Chinese markets.”
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