The landscape of investment in China has witnessed a remarkable shift this year, particularly with the surge in demand for bond exchange-traded funds (ETFs). With a total market scale exceeding ¥160 billion, the bond ETF sector has experienced exponential growth, doubling from the beginning of the year. Over the last six years, bond ETFs have demonstrated an impressive annual growth rate of 83%, surpassing the 48% growth seen in their equity counterparts. Furthermore, the number of bond ETFs with assets over ¥10 billion has increased from just two at the start of last year to five today.

Several experts attribute this rapid expansion of the bond ETF market to a combination of factors. For instance, Professor Tian Lihui from Nankai University notes that the volatility of equity assets in recent years has led institutional investors, such as banks, to favor credit bond ETFs as a more stable investment option. Additionally, Chen Li, director of Chuan Cai Securities Research Institute, points out that the current bull market for bonds has created a conducive environment for the growth of bond ETFs, especially those focused on long-duration assets, which have garnered significant interest from investors.

On the policy side, new initiatives introduced in April, known as the "New National Nine Policies," have called for the establishment of a fast-track approval process for ETFs to further promote index-based investments. The high transparency inherent in interest-rate bond index funds aligns well with the regulatory requirements imposed on institutions, making them an attractive option. Moreover, new bond ETFs have been included in financing options for margin trading, and the ongoing reforms to reduce fees for public funds have positively impacted the growth of passive investment strategies. The market's increasing ability to price bonds effectively supports the foundation for the development of bond ETFs, with regulators actively facilitating connections between the interbank and exchange markets as well as endorsing innovative product development.

Investors have the option to either subscribe or redeem through the primary market or trade them on the secondary market at their convenience, benefiting from a "T+0" transaction system. Chen Li elaborates that the diversification benefits of ETFs stem from the typically broad index replication method employed in their construction, which helps dampen the repercussions of any single bond's defaulting.

Another notable feature of bond ETFs is their precise duration matching and tax benefits. Professor Tian emphasizes that bond ETFs allow investors to select combinations based on specific durations and types, tailoring their investments to align with their strategies. Furthermore, both individual and institutional investors can enjoy tax exemptions on dividend income earned from securities investment funds, while public funds investing in bonds enjoy a full exemption from corporate income tax, a significant advantage over other asset management and proprietary trading institutions.

Despite the impressive growth observed, the bond ETF sector still holds substantial room for expansion, as it only accounts for a relatively small percentage of the total ETF market. Chen Li believes that bond ETFs are still in their early developmental stages and emphasizes the need for enhancing connectivity between interbank markets and exchange markets to achieve broader market reach.

Moreover, the current variety and formats of bond ETFs available in China are limited. Chen advocates that the key to the development of bond ETFs lies in innovation, suggesting that institutions focus on creating cross-market bond ETFs and expanding duration and type coverage to meet diverging investor needs.

As recognition of index-based investment philosophies grows among investors, the role of ETFs is expected to evolve, potentially serving an even more active function in drawing in medium to long-term investments, supporting the real economy, and addressing residents' wealth management demands. Professor Tian suggests that there should be a stronger integration of bond ETFs within the scope of fund advisory services and encourages the exploration of foreign investments as a means to enrich the existing investor demographic, enhancing investment channels for bond ETFs.