Over the past decade, the bond market in China has undergone a remarkable transformation, evolving into one of the most significant financial markets in the countryTo illustrate this growth, the total scale of the bond market has surged from 48 trillion yuan in 2015 to an astonishing 164 trillion yuan today, marking a remarkable increase of 242%. Such an expansion has not only influenced the market dynamics but has also led to a considerable rise in the percentage of bond balance relative to the nation’s GDPIn 2015, this figure stood at 70%, and as of the end of 2023, it has climbed to an impressive 124%. This rapid growth in the bond market also paves the way for the rise of bond funds, which have become an essential component of the asset management strategy in China.

As the bond fund sector matures, various types of these funds have emerged, including short-duration bonds, intermediate bonds, long-duration bonds, passive bond funds, and types such as convertible bonds

Investors have generally responded positively to these options, enjoying an array of investment strategies tailored to diverse financial needsHowever, in recent years, there has been an ongoing trend of declining interest rates as various initiatives push for high-quality development across industriesConsequently, the anticipated returns of bond funds have faced downward pressure, leading to a tighter space for excess yield offered by actively managed fundsThis has resulted in investors becoming increasingly selective in their choices, often emphasizing specific characteristics and benefits of the bond products they choose.

Notably, passive bond funds have gained a significant following due to their inherent advantages such as high transparency, stable investment styles, and risk diversificationConsequently, they have become a focal point for development among various fund management companies seeking to cater to the growing appetite for more predictable investment options

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It has been observed that when investors manage to identify robust indexes, the long-term performance of passive bond funds can shine exceptionallyCoupled with low operating expenses and ease of trading, these funds offer a highly competitive edge, allowing investors to swiftly adjust their positions according to changing requirements.

When looking at international trends, one cannot overlook the bond market in the United States, which remains the largest globallyAs of 2023, the scale of bond funds in the U.Sreached approximately $6 trillion, with active bond funds, bond ETFs, and index bond funds comprising 59%, 25%, and 16% of this market, respectivelyThe passive bond funds alone encompass over 40% of the total market shareFurthermore, the compound annual growth rate over the past five years has shown passive bond ETFs growing by 18% and index funds by 9%, a stark contrast to the 1% growth rate of actively managed funds

This might be attributed not only to their transparency and low costs but also to their strong competitive edge in terms of post-fee returns, gaining popularity among financial advisors and institutional investors alike.

Bringing the focus back to China, the rapid evolution of passive fund options in the equity market echoes the trends seen in bond fundsRecent data indicates that the scale of passive equity funds ballooned from 0.6 trillion yuan in mid-2019 to a whopping 2.1 trillion yuan by June 2024, with the number of products skyrocketing from 520 to over 1600. This diversification includes both traditional funds tracking major indices like the CSI 300, as well as new offerings centered around emerging industries and themes, thereby catering to various investor goals.

Currently, passive bond funds in China are entering a phase of accelerated growth

According to data from Wind, by June 2024, the size of passive bond funds approached 1 trillion yuan with 289 distinct products, nearly doubling in scale over the previous year aloneThe range of products available now covers critical categories including interest-rate bonds, credit bonds, interbank certificates of deposit, and convertible bonds, and has evolved to include themes like green finance, regional investments, and central enterprise bondsThere is also significant growth in bond ETFs, with their size nearing 110 billion yuan as of mid-2024, reflecting a remarkable doubling since the beginning of 2023, alongside numerous products now surpassing the 10 billion yuan threshold.

Looking forward, the potential for passive bond funds remains extensive, with essential areas still open for product innovation, particularly amidst new regulations which demand more from institutional clients concerning measurement and capital efficiency

This could lead to exciting new business opportunities within the sectorOne promising approach being implemented is a strategy termed “active passive investment,” championed by Huatai-PineBridge InvestmentThis strategy maintains focus within the parameters of the fund's objectives and investment contract while leveraging proactive management to optimize excess returns.

Such a methodology is particularly suitable for passive bond funds given the varying liquidity levels of individual bonds and the limitations on minimum trading quantities, which require a more nuanced approach to index-tracking rather than simple replication seen in stock index fundsThe commitment to managing the tracking errors while ensuring positive performance relative to the benchmark is criticalIn practice, this strategy has proven successful and has led to the generation of excess returns for investors under our management, thereby enhancing their overall experience.

With our firm’s extensive preparedness in advancing passive bond fund offerings since 2018, we have established a multifaceted grid for managing underlying fixed-income assets across various dimensions including duration, ratings, and themes