New China-only bond index hailed as key to wooing overseas investors
Analysts welcomed the new gauge as a key step in opening up China’s US$12 trillion debt market and predicted it would attract capital from overseas
An index that will track purely Chinese bonds was launched in Shanghai on Friday, targeting the growing number of international investors wanting a piece of the world’s third biggest fixed-income market.
Analysts hailed the new gauge as a key step in opening up China’s US$12 trillion debt market and predicted it would provide a much-needed boost to investment from overseas.
It is the first China-only bond index to be rolled out by IHS Markit and ChinaBond, and will initially track 368 bonds issued by the government and the country’s three “policy banks”.
“The opening of the China onshore bond market is a significant development for global investors. It will create new investment opportunities and diversification benefits for their portfolios,” said Kheng Siang Ng, Asia-Pacific head of fixed income at State Street Global Advisors.
“As major bond indices begin to include or track China bond markets either as part of global bond indices or stand-alone onshore China bond index, we would expect a steady rise of foreign bond inflows into China.
“Increased foreign participation in the China bond market will enrich the mix of investors trading flows, creating more active trading in this market.”
At a ceremony to launch the index, Jin Penghui, governor of the Shanghai branch of the People’s Bank of China, said the index will help overseas investors seize opportunities and assess risks.
“It will become a tool and a source of information for foreign investors and attract passive funds and long term funds such as pensions from overseas,” he added.
Named the iBoxx ChinaBond Government and Policy Banks Bond Index, it is the first to be rolled out under an arrangement between IHS Markit, a London-based business services provider, and ChinaBond Pricing Center, a subsidiary of China Central Depository and Clearing Co (CCDC), the country’s main bond clearing house.
Speaking at the launch, ChinaBond’s chairman Bai Weiqun said the index is another milestone in the opening up of China’s bond market that will help attract overseas funds and pricing.
According to recent data from JPMorgan, foreign capital flowing into China’s onshore bond market has surged to more than US$80 billion since the beginning of this year. But as of the end of August foreign ownership still only accounted for 2 per cent of the market, or 1.75 trillion yuan (US$250 billion).
The “iBoxx ChinaBond” indices could drive that up to as much as 10 per cent, according to Shane Akeroyd, regional head of APAC, IHS Markit.
“We are absolutely expecting interest from overseas investors to continue to grow, to increase significantly,” he told the Post.
While IHS Markit is not alone in gaining a foothold in China’s bond data business, the index launched on Friday is the first of its scale, according to Akeroyd.
“What makes this unique is we are one of the largest fixed-income providers in the world and in Asia, and from an ETF perspective, we are the biggest,” he said. “Our partner, ChinaBond, is the largest provider of bond pricing and valuations in China. This is the combination of two powerhouses.
“ChinaBond’s information is not available to any other competitors, that is the reason this is a first.”
The new index will initially track 162 government bonds and 206 bonds issued by the policy banks, the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China.
IHS Markit has not yet signed up any asset management firms to sell exchange-traded funds (ETFs) products with iBoxx ChinaBond as the underlying gauge but hopes to do so in the future.
China opened its interbank bond market for the first time in 2016, giving foreign investors access to fixed-income products. Access was further expanded last year when the regulator unveiled the “bond connect” programme with the Hong Kong bourse, a scheme similar to stock exchange links.
In March, Bloomberg announced it would add yuan-denominated debt to its global bond index starting in April 2019, to be phased in over a 20-month period. A total of 386 securities, namely government sovereign bonds and debts issued by China’s state policy banks, are to be included in its Bloomberg Barclays Global Aggregate Bond Index, with an initial weighting of 5.5 per cent.
Last month FTSE Russell said it was considering adding China to its global bonds indexes. Despite being on review for inclusion since 2016, the JPM Emerging Market Bond Index is yet to include yuan-denominated securities.
By mid-2019, IHS Markit hopes to introduce China corporate bonds indices, potentially followed by commercial paper indices and asset-backed securities indices, backed by the expected continuation of interest by the international market.
“You have the interest in China generally; the interest in China from a credit and return perspective, and the overlay of interests in passive investment and ETF markets. What we are doing really addresses all of those,” said Akeroyd.
“Promoting the availability of pricing and indices to foreign investors is a way of ensuring interest in those markets. These types of indices provide transparency and international investors want that.”