BlackRock drops Chinese bond ETF

BlackRock, the world’s largest asset manager, has postponed the launch of an exchange-traded fund that invests in Chinese bonds, amid growing tensions between Washington and Beijing and a reversal in the spread between the Chinese and American returns.

Two people familiar with the decision said BlackRock had “indefinitely” suspended the ETF, which had won regulatory approval and was due to launch in the United States in the second quarter of this year.

One of the people said the move was made in part because of concerns about a backlash in Washington against funding the Chinese government with US capital. “It’s too big a political risk,” he said.

BlackRock declined to comment on what it called “market speculation.”

The ETF’s suspension underscores the challenges global asset managers face in tapping into the world’s second-largest fixed-income market following Washington and Beijing’s geopolitical standoff on everything from the Russian invasion of Ukraine to critical technologies.

“Investors have been warned that there could be very negative consequences imposed by the United States in various scenarios,” said Andrew Collier, managing director of Orient Capital Research in Hong Kong. “There is a real concern that there could be some sort of (US-led) sanctions that would make it difficult for Western investors to withdraw their [money] from China.”

After US House Speaker Nancy Pelosi angered Beijing by visiting Taiwan in July, Chinese President Xi Jinping launched an unprecedented series of military exercises around the self-governing island. and suspended a wide range of military and diplomatic communication channels with the United States.

Meanwhile, Washington has implemented a series of tough new sanctions restricting Chinese companies’ access to cutting-edge technologies. Xi and US President Joe Biden could finally hold their first face-to-face meeting next week at the G20 leaders’ summit in Bali, Indonesia.

BlackRock’s move contrasts with the successful launch in Europe three years ago of a similar product – the iShares China CNY Bond UCITS ETF, one of the company’s best-selling ETFs last year with an inflow of $5 billion.

“The fund’s performance has been impressive,” said a London-based portfolio manager, referring to its 8.2% return in 2021.

But the Federal Reserve’s ferocity towards inflation this year, combined with economic lethargy and central bank restraint in China, has undermined the appeal of Chinese bonds.

The iShares China CNY Bond UCITS ETF is down around 9% this year. Investor flight from Chinese risk also helped shrink the size of the fund by nearly two-thirds over the same period.

“Economic fundamentals do not support a Chinese bond ETF when investors can earn a 4% return on US Treasuries and 3% on their Chinese equivalents,” said one of the people familiar with his suspension.

Additional reporting by Tom Mitchell in Singapore

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