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 yearOver the last six years, bond ETFs have demonstrated an impressive annual growth rate of 83%, surpassing the 48% growth seen in their equity counterpartsFurthermore, 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 factorsFor 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 investmentsThe high transparency inherent in interest-rate bond index funds aligns well with the regulatory requirements imposed on institutions, making them an attractive optionMoreover, 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 strategiesThe 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 systemChen 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 strategiesFurthermore, 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 marketChen 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