For marketing purposes

For professional clients /

qualified investors only

Too big to ignore

Chinese local bond market. Investing in
Chinese government and policy bank-bonds.

By: Christian Kunth, Product Development Passive, Executive Director, UBS AM

China represents one of the key markets for UBS across its businesses. In addition, Chinese
Treasury bonds are viewed as one of the strongest, largest and most liquid segments of China’s
bond market, along with policy bank financial bonds and bonds issued by local governments.
By developing an ETF solution to cover this market, we provide our clients with an additional
tool to diversify their investments and provide access to the China fixed income market.

1
UBS ETFs J.P. Morgan CNY China Government
1–10 Year Bonds
Investing in China bonds
– As one of the first UCITS ETFs of its kind, this
product provides exposure to the Chinese China is the fourth largest sovereign bond market following
Government and Policy Bank Bonds market and the US Dollar, Euro and Japanese Yen markets. As per
includes eligible fixed-rate, CNY-denominated January 2019, the market universe included 364 Chinese
government and policy bank bonds maturing securities with a market cap of CNY 21.4 trillion which is
within the next 1 to 10 years. equivalent to approximately USD 3.3 trillion. Bloomberg
Barclays with their flag- ship Global Aggregate Bond Index,
– The ETF tracks the J.P. Morgan China Government followed by J.P. Morgan, announced the inclusion of CNY
+ Policy Bank 20% Capped 1–10 Year Index. bonds in their indices, a move that should encourage other
– As such, the ETF is a refined building block for the providers to follow suit. All in all, China’s index inclusion is
construction of globally diversified portfolios. likely to generate investment of almost USD 300 billion in
the coming years. To further attract foreign investment, the
– Removing longer maturity bonds substantially Chinese government has also given foreign institutional
improves the liquidity of the overall portfolio and investors a three-year tax exemption on bond interest
the capping of the policy bank issuers at the UCITS income until November 2021. Moreover, the country has
maximum of 20% improves the market been assigned a positive outlook by MSCI ESG Research,
representation and helps to increase returns. highlighting the government’s efforts in improving their
current sustainability rating.

Relative to developed markets, the Chinese market compares

favorably both from a valuation and fundamentals standpoint
– for example their debt to GDP ratio. Moreover, adding
policy banks’ bonds to an ETF with an issuer cap of 20%
adds an attractive yield and improves the risk/return profile
of the China CNY sovereign exposure. Additionally, Chinese
bonds are only accounting for 6.8% of global aggregate
bond indices as of February 2021 and analyses show that
this allocation can offer significant diversification benefits to
a global bond portfolio.

Figure 1: Share of China economics in the global GDP

250%

200%

150%

100%

50%

0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
China, People's Republic of Japan United Kingdom United States

Source: IMF. Data from 1995 to 2018. Debt Concept: Public debt: GG as defined in Maarstricht criteria.

2
Investment objective Figure 2: Index construction overview
The J.P. Morgan China Government + Policy Bank 20%
Capped 1–10 Year Index aims to track the performance
of eligible fixed-rate, CNY-denominated government
and policy bank bonds maturing within the next
1 to 10 years. Securities must be listed on the China
interbank market to be eligible. The index exposure
to each of the three policy bank issuers is capped at
20% with the excess market value redistributed across
the index on a pro-rata basis. The index is based on
the composition and established methodology of the
J.P. Morgan China Aggregate Bond Index.

Index construction methodology

The starting bond universes are the J.P. Morgan Global
Bond Index Emerging Markets Broad China (GBI-EM
Broad China) and the China Policy Bank Bond Broad
Index, see Figure 2.

Firstly, longer maturities (10y+) will be removed to

improve the liquidity of the universe. Secondly, the
indices will have their market value weights combined
and then each policy bank issuer will be capped at
20% to be aligned with UCITS regulations. Excess
weight is distributed pro-rata across other remaining
issuers. The index rules also include a number of
requirements on maturities as laid out in Figure 3.
Source: J.P. Morgan, UBS Asset Management. Data as of February 2021.

Figure 3: Index criteria J.P. Morgan China Government + Policy Bank 20% Capped 1–10 Year Index

Instrument – Includes: Liquid, fixed-rate coupon bonds listed on the interbank market.
Type – Only senior bonds are eligible.
– Excludes: Floating-rate bonds, amortizing bonds, capital securities, convertibles,
– inflation-linked, retail saving bonds and subordinated bonds.

Issuers – Government bonds: the Ministry of Finance

– Policy bank bonds: China Development Bank, Agricultural Development Bank of China,
and Export-Import Bank of China

Remaining Maturity – Entry: securities must have minimum 2.5 years

at Inclusion and maximum 10 years remaining to maturity at issuance to be eligible.
– Exit: securities with less than 13 months remaining to maturity would be excluded
from the index.

Policy Bank Issuer The exposure of policy bank issuers in the index is capped at 20% each. Issuers that
20% Cap Methodology exceed 20% of the uncapped market value based index are limited to 20% with the excess
market value redistributed across the board on a pro rata basis. The exposure of China
government bonds in the index is not subject to any cap.
Currency The bonds are CNY denominated and the index is calculated in USD (not fx-hedged).
Eligible instruments Securities must be listed on the China interbank market to be eligible
FX rates All FX rates used for hedged/unhedged returns are as of 4pm London time provided by
WM/Reuters
Source: J.P. Morgan, UBS Asset Management. Data as of February 2021.

3
Performance
The J.P. Morgan China Government + Policy Bank 20% The resulting J.P. Morgan China Government + Policy Bank
Capped 1–10 Year Index has delivered a return of 3.26% 20% Capped 1–10 Year Index has a very similar return
per annum in the period from 31 January 2016 to 31 profile (Figure 5) as compared to a China Aggregate index
January 2021 (Figure 4). The graphic shows how different which does not cap policy bank bonds at the UCITS
components contribute to this overall performance. maximum of 20% and which includes all maturities. Instead,
Allocation to the Policy Bank sector boosts the overall our index applies a 1-10 maturity filter which improves
return by +1.97% exceeding the return delivered on liquidity without significant impact on returns.
sovereigns. Adding the 10y+ maturity filter reduces the
returns by a total of 1bps for CNY government bonds, but
does not affect returns for Chinese Policy Bank bonds.

Figure 4: Performance attribution of J.P. Morgan China Government + Policy Bank 20% Capped 1–10 Year Index
(31 January 2016 – 31 January 2021)

Source: J.P. Morgan, UBS Asset Management. Data as of 31 January 2021.

Figure 5: Performance of J.P. Morgan China Government + Policy Bank 20% Capped 1–10 Year Index
(29 February 2016 – 26 February 2021)

125

120

115

110

105

100

95
2016 2017 2018 2019 2020 2021
JPM China Government + Policy Bank 20% Capped 1-10 Index
J.P. Morgan China Aggregate Broad Index
Source: J.P. Morgan, UBS Asset Management. Data as of 26 February 2021.

4
The J.P. Morgan CNY China Government Figure 6: Key metrics of the index
1–10 Year Bond 20% Policy Bank capping
Index has a small 11bps tracking
difference as compared to the same index
without capping and maturity filtering
(Figure 6) and a very low tracking error.
The yield-to-maturity of the index is
3.19%, with a duration of 4.15, and
average rating of A1/A+/A+
(Moodys/S&P/Fitch) as of February 2021
(Figure 6). Interestingly, the annual
volatility compared to that same index is
reduced by 8.51%.

Source: J.P. Morgan, UBS Asset Management. Data from 29 February 2016 to 26 February 2021.
Please note that past performance is not a guide to the future.

Conclusions
The J.P. Morgan China Government + Policy Bank 20% Capped 1–10 Year Index is an
innovative index that is tracked by the recently launched UBS ETF (LU) J.P. Morgan CNY
China Government 1–10 Year Bonds UCITS ETF, available in USD. With a robust and
proven methodology, it offers investors easy access to the Chinese government market.
The ETF solution offers the investor an additional tool to diversify their investments and
provide access to the China fixed income market.

About UBS ETFs & Index Funds

Index-tracking investment solutions have been a core competence of UBS Asset Management
for over 35 years. As a leading fund house in Europe, UBS launched its first ETF in Europe in 2001
and is currently both one of Europe´s foremost providers as well as a dominant force in currency
hedged ETFs in the region. UBS ETFs offers investors a transparent and flexible opportunity to
diversify their investments across key markets and all asset classes, including equities, bonds, real
estate, commodities and alternative investments. UBS ETFs are listed on the following stock
exchanges around the world – SIX Swiss Exchange, Borsa Italiana, London Stock Exchange,
Deutsche Börse XETRA, Euronext Amsterdam, Australian Securities Exchange ASX, KRX Korea
Exchange, Tokyo Stock Exchange and the Mexican Stock Exchange BMV.

5
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6
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