Unleash the potential of China bonds BlackRock China Bond Fund

Unleash the potential of China bonds

  • IMPORTANT:

    1. The China Bond Fund seeks to maximise total return. The Fund invests at least 70% of its total assets in fixed income transferable securities denominated in Renminbi or other non-Chinese domestic currencies issued by entities exercising the predominant part of their economic activity in the PRC through recognised mechanisms including but not limited to the Chinese Interbank Bond Market, the exchange bond market, quota system and/or through onshore or offshore issuances and/or any future developed channels. The Fund is a RQFII Access Fund and a CIBM Fund and may invest without limit in the PRC via RQFII Quota and in the CIBM via the Foreign Access Regime and/or Bond Connect and/or other means as may be permitted by the relevant regulations from time to time.

    IMPORTANT:

    1. The China Bond Fund seeks to maximise total return. The Fund invests at least 70% of its total assets in fixed income transferable securities denominated in Renminbi or other non-Chinese domestic currencies issued by entities exercising the predominant part of their economic activity in the PRC through recognised mechanisms including but not limited to the Chinese Interbank Bond Market, the exchange bond market, quota system and/or through onshore or offshore issuances and/or any future developed channels. The Fund is a RQFII Access Fund and a CIBM Fund and may invest without limit in the PRC via RQFII Quota and in the CIBM via the Foreign Access Regime and/or Bond Connect and/or other means as may be permitted by the relevant regulations from time to time.

    2. The Fund may invest in debt securities that are subject to actual or perceived ratings downgrade. An increase in interest rates may adversely affect the value of the bonds held by the Fund. The Fund may invest in non-investment grade and unrated bonds that may be subject to higher default, volatility and liquidity risks. The Fund invests in bonds issued or guaranteed by governments or authorities, which may involve political, economic, default or other risks. The Fund may invest in urban investment bonds issued by Chinese local government financing vehicles (“LGFVs”) that are subject to default risk of the LGFVs.

    3. The Fund is subject to restrictions and requirements applicable to the Renminbi Qualified Foreign Institutional Investor (“RQFII”) investments, which may adversely affect the fund’s value due to regulatory uncertainties. The Fund is subject to risks associated with investment in the China Interbank Bond Market.

    4. The Fund's investments are concentrated in People’s Republic of China (PRC). This may result in greater volatility than more broad-based investments. The Fund invests in certain emerging markets and may be subject to political, tax, economic, social and foreign exchange risks.

    5. The Fund is subject to PRC tax risks, currency risks, securities lending counterparty risks, foreign investments restrictions risks, currency control/ conversion risks and currency hedging risk.

    6. Class 6 Shares pay dividends gross of expenses and/or from capital at the Directors’ discretion. Paying dividends gross of expenses may result in more income being available for distribution; however these shares may effectively pay dividends from capital – may amount to a partial return or withdrawal of an investor’s original investment or capital gains. All declared dividends result in an immediate reduction in the NAV price of the share class on the ex-dividend date.

    7. The Fund may use derivatives for hedging and for investment purposes. However, usage for investment purposes will not be extensive. The Fund may suffer losses from its derivatives usage.

    8. The value of the Fund can be volatile and can go down substantially within a short period of time. It is possible that a certain amount of your investment could be lost.

    9. Investors should not make investment decisions based on this document alone. Investors should refer to the Prospectus and Key Facts Statement for details including risk factors.

You don’t have to look far to find the income you need.

Target to capture yield and growth opportunities in the development of China’s bond market

The rise of China’s bond market to become the world’s second largest1 has been driven primarily by local investors. The next stage of its growth should see increased foreign ownership with ongoing inflows to the market as Chinese securities are increasingly represented in flagship global bond benchmarks.

>US$18T in size
>US$18T in size1
2nd largest in the world
2nd largest in the world1
15% annualized growth rate
15% annualized growth rate2
<3% foreign ownership
<3% foreign ownership2

In this low for longer interest rate environment across developed markets, income-seeking investors can look outside of core markets and consider China bonds to deliver potential yield opportunities and diversification benefits, and add resilience to a global portfolio. China bonds offer comparatively higher yields with muted volatility, and have lower correlations to global risk assets. This is especially important during times of market uncertainties.

BlackRock China Bond Fund:

Relatively attractive monthly income distribution

5.0% p.a. (A6 RMB share class as of 30 September 2021)
A6 share class aims to pay a dividend on a monthly basis. Dividend Payment is not guaranteed, and is not indicative of the return of the Fund. The Fund may effectively pay dividend from capital. See important information 6)3
5.5% p.a. (A6 RMB share class as of 29 January 2021)

Latest 6 months dividend table – A6 RMB

Month Annualized Yield
9/30/2021 5.03%
8/31/2021 4.95%
7/30/2021 4.99%
6/30/2021 5.41%
5/31/2021 5.40%
4/30/2021 5.41%

A6 share class annualized yield = (Dividend rate / ex- date NAV) * (12*100). Dividend yield is not guaranteed, and is not indicative of the return of the Fund. Past performance is not a guide to future performance. Investors may not get back the full amount invested. A6 share class inception date: 11-Jul-2018.

Ranked 1st quartile
In 3 and 5-year periods and Morningstar 5-star rating4
Ranked 1st quartile
Paragraph-8
Paragraph-9,Paragraph-10
Paragraph-11

The strong performance of BlackRock China Bond Fund over the past three years has been balanced with lower volatility and drawdowns.

Resilience to your portfolio
Risk return table


Source: Blackrock, Data as of end September 2021. The returns are calculated based on A6 USD-H share class (Inception date: 4 July 2018). and prior to July 2018 the A2 CNH share class, hedged back to USD (using the daily hedging costs). Calendar year performance: A6 USD-H:YTD: -1.4%, 2020: 6.2%, 2019: 8.1%, 2018: 2.4% (inception to year end); A2 CNH:YTD: 0.7%, 2020: 8.2%, 2019: 8.8%, 2018:3.3%, 2017:8.8%, 2016:4.5%. The examples provided are strictly for illustrative purposes only and serves as a general summary. It is not exhaustive and should not be construed as investment advice or recommendation. The solutions are based on the specific allocations and outcomes are unique. The allocations described are hypothetical, random and conceptual. Past performance is not a guide to future performance. Investors may not get back the full amount invested. Performance is calculated based on the period NAV-to-NAV with dividend reinvested. Performance figures are calculated net of fees. Quartiles: Morningstar. Category: Morningstar’s USD Flexible Bond. Peer comparison shown is for illustrative purposes only and does not purport to compare all funds in the same investment universe nor does it compare all characteristics of the funds shown. Reference to the name of the funds should not be constructed as investment advice or investment recommendation of those funds.

Relatively low correlation may offer greater diversification and resilience to your portfolio5

China bonds have lower correlation to different asset classes6 and the Fund's relative short duration can help provide significant diversification with existing fixed income exposure and help investors manage risk, offering greater resilience during market fluctuation.

Low correlation of onshore credit to global risk assets (5-year as of end September 2021)

Low correlation of onshore credit to global fixed income (5-year as of end February 2021)

 

Source: Bloomberg, end September 2021. China Onshore Credit: Bloomberg Barclays China Agg total return index (USD-H); Asian High Yield Credit: JP Morgan Asian non-Investment Grade Index; Asian USD Credit: JP Morgan Asian Credit Index; Global IG Corp (USD Hedged): Bloomberg Barclays Global Corporate Index; Global HY Corp (USD Hedged): Bloomberg Barclays Global HY Corporate Index; EM USD Sov/Quasi Credit: JP Morgan Emerging Markets Bond Index; US Equities: S&P 500; Asian Equities: MSCI AxJ. Index performance is for illustrative purpose only. Investors cannot invest into an index directly.

Despite recent individual credit events, the risk of defaults appears to be lower in China bonds than those in other areas, thanks to a more advanced stage of recovery of China from the pandemic and its deleveraging efforts before Covid-19.

We believe the latest series of defaults seen in China is an integral part of the credit cycle, not a systemic risk. The default rate in the onshore market is of similar level to that of 2020 and we believe the default rates are going to remain at around the same level in 2021.

China default rates remain low compared to global averages

 

For illustrative purpose only and there is no guarantee that the forecast will be realized. Source: JPMorgan Chase (Asia, US, Emerging Markets), BlackRock, 8 September 2021 data and forecasts. Any opinions and/or forecasts represent comments on the market environment at a specific time. Estimates are not intended as predictions, guarantee of future events or future results.

 


A "go-anywhere" strategy with cross-border RMB bond offering
Have the ability to invest tactically across the China onshore and offshore RMB bond markets, the offshore Dim-sum market and hard currency China credit market to take advantage of the potential attractive valuations depending on different market environment.
Choice Arrow

Our latest videos on Managing Credit Risks in our Portfolios

While we do see a potential pickup in China’s credit defaults this year, we don’t think it is sufficient or enough to pose systematic risk to the onshore bond market but rather provide opportunities for investors to generate alpha amid greater credit differentiation. 

Q: We often hear market noises around Chinese credit events.  What is your view and how do you mitigate credit risks during portfolio construction? please show for at least 8 secs

Defaults are just one part of the story.  Chinese regulators have a long sought to raise financial market transparency and support the path towards the maturity of the onshore credit market.  This is through policies to de-lever the economy and also through policies to remove the moral hazard of implicit guarantees for local SOEs. 

The market is now poised (remove stumble here) for further credit differentiation which are positive signs for investors.

At this point, China’s default rate still significantly lags that of its global counterparts despite the pandemic. 

The impact of a single bond default should have minimal impact to an overall well diversified bond portfolio. 

We focused on the total return of our holdings through the entire holding period and look to maximize risk-adjusted returns rather than just minimizing defaults. 

Q: What is BlackRock’s approach in credit selection, especially when majority of China onshore bonds are unrated or not deemed as quality bonds?

At Blackrock, we have an increasing presence through our research team onshore in China.  This boot on the ground approach increases our research capabilities onshore in China and our onshore research team collaborates on a day-to-day basis with our offshore credit research team. 

We apply the same credit research standards across both our onshore and offshore credit research teams, and this allows us to compare and contrast the quality of credits both in the onshore and offshore credit markets. 

In addition, we apply an internal rating to all onshore credits in line with standards set by international rating agencies.  This allows us to look at relative valuations across both the onshore and offshore credit markets. 

We continue to focus on our in-depth credit research analysis, seeking to take advantage of our local knowledge and regional presence.

This dedicated China research coverage across both the onshore and offshore credit markets allows us to uncover opportunities for our investors. We seek to deepen our understanding of company-specific fundamentals, but also seek to identify those companies with strategic and social importance to the state and municipalities.  This is a very important part of onshore credit research in addition to understanding fundamental risk associated with the companies.

Credit selection and mitigating credit risks

The potential pickup in China’s credit defaults provide opportunities for investors to generate alpha amid greater credit differentiation. The impact of a single bond default should have minimal impact to an overall well diversified bond portfolio. 

Q: We often hear about local SOEs and LGFVs when investing in Chinese bonds. What are your views on them?

For investors who invest into the onshore credit market, we understand that there is a clear distinction between local SOEs (state-owned enterprises) and LGFVs (local government financing vehicle), in terms of the systematic importance to the state that own them. 

LGFVs are entities set up to provide social benefits to the populace.   They tend to be in strategically important factors such as utilities and infrastructure. 

On the other hand, local SOEs are involved in competitive industry serving commercial outcome for example, in sectors such as property and mining.   

This is where we expect to see greater credit differentiation, especially in weaker industrial local SOEs. 

As such, we continue to focus on high quality central SOEs and strategically important LGFVs, while avoiding weaker local industrial SOEs. 

When analyzing SOEs, we take a three -pronged approach, the first is understanding and analyzing the fundamentals of the local government and municipality.  The second, is the company’s standalone credit fundamentals and its ability to generate cash flows.  We like entities with strong cash flow generating capabilities such as highway projects with stable toll operations.  And thirdly and also very importantly, there is the linkage between the company and the corporate and the local government and municipality that is supporting them and the company strategic importance to the states.

SOEs and LGFVs and their roles in bond portfolios

There is a clear distinction between local state-owned enterprises (SOE) and local government financing vehicle (LGFV) in their systematic importance to the state that owns them.  We continue to focus on high quality central SOEs and strategically important LGFVs, while avoiding weaker local industrial SOEs.

China fixed income and credit continues to have the potential to deliver attractive income with diversification benefits compare to global asset classes. 

China credit market update – Managing credit risks in our portfolio – part 3

Q: Looking beyond the recent credit events, why should investors continue to have exposure to both the onshore and offshore china bond market?

With low yield globally, especially in the developed markets, and with the increasing depth of the onshore China credit markets, the majority of the world’s attractive yielding fixed income assets are now in China.

In addition, the asset class has low sensitivity to US rates which provides another avenue for diversification for investors.

Historically, the correlation between the onshore and offshore credit markets have been very low and that it’s likely to persist.   Through technical allocation across both the onshore and offshore credit markets, we aim to deliver a high risk-adjusted returns across market.

In 2018 and in Q1 2020, amidst escalating US China trade tensions and the pandemic in 2020, the onshore credit markets saw yields moving lower, even as the offshore credit markets saw increased volatility. 

We have allocated (remove pause here) more capital away from the offshore credit markets into the onshore credit markets which allowed us to maintain resilience performance in our portfolio.    At the same time, post these two episodes, the offshore credit markets rally after and in our portfolios, we have reallocated capital away from the onshore credit markets into the offshore credit markets in order to take advantage of the rally (remove “in the offshore credit markets” from the video. 

This dynamic asset allocation allows us to build highly resilient and diversified portfolios to deliver the higher risk-adjusted income that investors are looking for.

Manage credit risks with onshore and offshore bond exposure

Dynamic asset allocation between onshore and offshore china bond market enables us to build highly resilient and diversified portfolios to deliver the higher risk-adjusted income that investors are looking for.

More resources to help you navigate the China bond market