BlackRock to launch first RMB bond ETF in HK

BlackRock will become the first asset manager to launch a renminbi bond exchange-traded fund in Hong Kong, on June 18.

The $3.7 trillion US fund house won approval from Hong Kong’s Securities and Futures Commission on Friday for the iShares RMB Bond Index ETF. It invests in RMB-denominated bonds issued by companies and government agencies as well as other companies listed outside China, also known as CNH or dim-sum bonds.

While other firms have launched dim-sum bond products in the US – Guggenheim Investments, Invesco and Van Eck Global – BlackRock will be the first to offer such a product in Hong Kong.

There are only two bond ETFs listed in Hong Kong – HSBC’s ABF Hong Kong Bond Index Fund and State Street’s ABF Pan Asia Bond Index Fund – so bond ETFs account for very little market share, says Jackie Choy, ETF strategist at Morningstar in Hong Kong. That compares to bond ETFs market share of around 20% of AUM in the US market.

The iShares fund will therefore offer much-needed opportunity for diversification beyond the equity products that dominate the market.

The ETF will track the newly-created Citi RMB Bond Capped Index, a total-return index that covers 92 constituent bonds with a total market capitalisation of Rmb158.5 billion ($25 billion). It includes fixed-rate securities issued by governments, agencies, supranational and corporations issued or distributed outside China.

As of May 20, the index was most heavily weighted towards sovereign debt issued by the PRC government, with coupons ranging from 0.6% to 2.56%. The index currently has exposure to 18 countries, with China and Hong Kong carrying around 76% of the market weight.

The iShares ETF will be around 70% invested in investment-grade bonds, with some 7% in high-yield bonds. Around 23% of CNH bonds are not rated, according to the product prospectus.

While the index can only invest up to 30% of its assets in below-investment-grade bonds and non-rated sectors, the ETF has the flexibility to invest above that cap. But it will seek to limit the overall holdings of below-IG bonds and non-rated sectors to 30% of NAV before the end of the month.

It will also consider investing in other securities that are not included in the underlying index if that helps achieve its investment objective.

The ETF will trade in both RMB and Hong Kong dollars and will receive quarterly distributions in RMB only. The initial issue price for each unit is Rmb35, with the minimum board lot size of 100 units for investors and 40,000 for participating dealers. The total expense ratio is estimated to be 0.39%.

The total dim-sum bond market is still relatively small, illiquid and volatile, standing at around Rmb384 billion ($62.5 billion) at the end of 2012, although Choy notes the launch of this ETF might help improve liquidity.

Under normal circumstances, the ETF aims to have at least 95% of its assets invested, and can invest up to 10% of its net assets in financial derivative instruments.

Participating dealers are Citi, HSBC, KGI Securities, Macquarie, Standard Chartered and UBS Securities.