Goldman Sachs is certainly moving fast in the European ETF space after announcing it was launching a Chinese government bond fund a matter of weeks after its debut launch.
The Goldman Sachs Access China Government Bond UCITS ETF is part of an effort to “deliver more choice” by offering “additional geographical and currency diversification, alongside exposure to the maturing Chinese economy.”
In the context of the reasonably arcane world of emerging market index weightings, this fund is arguably a smart move. As Peter Sleep, senior investment manager at 7IM, says there is every reason for Goldman Sachs Asset Management (GSAM) to zero in on China in this way.
"China is the world’s second largest equity and bond market," he points out. "The index rules will allow China to be the third biggest component in the Barclays Bloomberg Bond market.
"It has a very stable government with a low level of overseas debt. It makes good sense to launch an ETF on Chinese Bonds. More sense than launching a UK gilt fund say, a much smaller market."
The rise of China, both in terms of equities and bonds, is clearly something investors cannot ignore and the recent debates regarding MSCI inclusion of A-shares within the weighting of China within the various competing EM indices is all a part of the process.
Nicolas Rabener, managing director at FactorResearch, points out that GSAM is following in the wake of iShares and Xtrackers which similarly have Chinese bond market funds, all priced between 0.35% and 0.40%.
He points out that the iShares version (CNYB) has gathered in £100m in assets since July 2019 while the Xtrackers (CGB) has gathered a rather less impressive £40m since launch in 2015. As he points out, that likely reflects the fact Chinese government bonds have historically featured extremely low weights in the global bond benchmark indices.
“However, China's weight will be increasing in the benchmark indices in the coming months and GSAM is trying to capture some of the flows,” Rabener adds.
The issue of the increased inclusion of Chinese A-Shares in the global emerging market indices has been the subject of some controversy after both MSCI and FTSE Russell began adding then to their respective indices in the summer.
Less at issue has been the simultaneous moves to include Chinese government bonds. The Bloomberg Barclays Global Aggregate index included them in September while the FTSE Russell World Government Bond index currently has Chinese govies on a watchlist with inclusion ot be considered in Match for potential inclusion in September next year.
Similar to the situation with A-Shares, the issue with Chinese government bonds has been one of access. But following moves on the part of the Chinese authorities to open up the market and make it easier for foreign investors, that calculation has changed.
These initiatives included the launch of the Bond Connect scheme in 2017, which allowed investors to buy and sell onshore bonds via Hong Kong as well as delivery versus payment and block trades, features which are common in other financial markets. Lastly, the authorities have also clarified how it will tax foreign investor gains from Chinese bonds.
As Rabener points out, with the weighting of Chinese government bonds set to rise from what has, until now, been extremely low levels in the various global bond indices in the coming months, GSAM is "trying to capture some of the flows".
Possible yes, desirable…?
So, a good move? For GSAM yes and also for the Chinese government. But for investors, the advice is, perhaps, more nuanced. As Sleep says, "that is not to say that retail investors should buy it – it is after all an emerging market and it will be quite volatile with a lot of the volatility coming from the exchange rate".
Moreover, as Rabener warns, it is “challenging to get a good understanding” of the Chinese economy – even more so given the trade tensions – and, as he adds, “even more difficult to analyse the Chinese debt market, which makes this ETF only suitable for fixed income specialists.”
Instead, he suggests that most investors would be “better served” by accessing a broad emerging market bond index ETF. “It is questionable if they should have such exposure at all,” he adds.
