When Chinese government bonds and policy financial bonds are fully included in the Bloomberg Barclays Global Aggregate Index, Bloomberg launched the world's first credit bond index that tracks internationally-rated Chinese issuers.
On November 5, Bloomberg announced the launch of the Bloomberg Barclays Liquid China Credit (LCC) Index, which tracks the highly liquid and tradable bonds denominated in RMB in Chinese inter-bank credit bond market .
At the beginning of November this year, Chinese government bonds and policy financial bonds were fully included in the Bloomberg Barclays Global Composite Index. At present, the weight of Chinese bonds in the index is about 6%, and RMB has become the fourth largest currency in the index after the US dollar, the Euro and the Japanese yen. Since April 2019, Chinese government bonds and policy financial bonds have been officially included in Bloomberg Barclays Global Composite Index, and this has been gradually completed in 20 months. This opened the way for RMB bonds to be included in the mainstream international bond index. Following the recent announcement by FTSE Russell that Chinese government bonds will be included in the FTSE World Treasury Index (WGBI), the Chinese bond market will be fully included in the world’s three major bond indices.
Steve Berkley CEO of Bloomberg Index Services Co., Ltd. said that after China's government bonds and policy financial bonds are fully incorporated into the global composite index, the creation of the LCC index will help global investors better understand and invest in the Chinese credit bond market. It is expected that this new index can help market participants better understand the characteristics of China’s credit bond market. Investors and asset managers can use the LCC index in a variety of ways, including new product launches, derivative contracts, and traditional benchmark setting etc.
Bloomberg explains the compilation method of LCC index
Ji Zhuang, head of Bloomberg's Asia-Pacific index business, told reporter that the compilation of the world's first China credit bond index that tracks the issuer's investment grade given by an international rating agency is the first step to establish a more widely accepted Chinese credit bond market by foreign investors. The index is expected to create a way for the inclusion of RMB credit bonds in the Bloomberg Barclays Global Composite Index.
In terms of the specific compilation method of the LCC index, according to Ji Zhuang, the compilation of the index is based on the same rules as the Bloomberg Barais China Composite Index, while using the transaction amount of bond in the National Interbank Funding Center (hereinafter referred to as the trading center) and the issuer ratings of the three major global rating agencies determine the bonds that can be included.
"In order to reflect the tradable and highly liquid parts of China's credit bond market, the LCC index adopts a unique compilation method, taking into account the bond transaction data of the trading center and other conditions. Specifically, the bond should meet the conditions that at least 10% of the trading days have been traded in the past three months and the total transaction amount exceeds 250 million yuan (inclusive)." Ji Zhuang said.
It is worth noting that the bonds included in the LCC index must meet the standards of the Bloomberg Barclays China Composite Index and must also meet: at least one of the world’s three major rating agencies which give the issuer an investment rating; non-subordinated bonds should have the expiration date exceeds 1 year. In addition, the bonds will remain in the index until the maturity, and the weight of issuance limit is 10%. The frequency of rebalancing the LCC index is once a month, and the frequency of adding eligible bonds is once a quarter.
As of October 30, 2020, the LCC index included 125 securities from 48 issuers. The average yield of bonds included in the index was about 3.4%, and the average duration was 1.9 years. From the perspective of the industry classification of the bond issuer, the financial category accounts for as high as 53%, and the government-related category accounts for 43%.
"Icebreaking" starts with the passive investors tracking index
After the issue of China’s treasury bonds and policy financial bonds, foreign capital has gradually turned its attention to China’s credit bond market, it is an inevitable process for China’s bond market to expand to the world. Bing Li, President of Bloomberg Asia Pacific, said that the types of foreign investors in China’s government bonds and policy financial bonds have been diversified. The release of the LCC index will help international investors better understand and evaluate China’s credit bond market and enhance international investment as well as enhance the interest and participation rate on China’s credit bond market.
The degree of internationalization of China's credit bond market is far less than that of government bonds and policy financial bonds. Although China’s bond market continues to attract the capital inflows of foreign capital, foreign investment enthusiasm is concentrated in the areas of national debt and policy financial bonds. There is a long way to go to attract the world investors due to the lack of foreign capital's understanding of China's credit bonds market and the imperfect infrastructure of China's credit bond market.
Jian Hu, vice president of E Fund and director of fixed income investment, said that there are three main reasons why most international investors have not yet fully accepted RMB credit bonds: First, the credit rating infrastructure of China’s bond market is not yet complete. Foreign rating agencies were only allowed to carry out bond credit rating business in China. At present, most domestic credit bonds have not been rated by international rating agencies. The second is the uniformity of the Chinese bond market, such as the inter-bank market and exchange market related rules and systems. Consistency needs to be further improved; third, China’s bond market needs to further strengthen the interaction between the issuers and investors, the interaction is relatively lacking in China’s credit bond market. The vast majority of investors and issuers have little communication, making overseas investor cannot understand the market more clearly.
In Jian's view, the launch of the world's first credit bond index that tracks internationally-rated Chinese issuers has "ice-breaking" significance. "Although large international asset management institutions are currently establishing credit analysis teams for Chinese market, there are still many international investors who are not asset management institutions restricted by the inability to establish a dedicated RMB credit bond analysis team, therefore it is difficult to understand the market for them in detail. The establishment of the LCC index will first promote international passive investors to track the index for investment. In this sense, the establishment of the LCC index is an ice-breaking measure."
However, ice-breaking is only the first step. Many industry experts, including Bing Li and Jian Hu, believe that the reform and opening up of China’s bond market has entered a new stage. In the future, China's bond market will be more challenging in terms of improving infrastructure, deepening the policy and mechanism reforms. .
"Take credit rating infrastructure as an example. Domestic credit bond issuers with extensive coverage by international rating agencies are expected to take at least five years. Therefore, it is expected that it will take at least three years to make China’s credit bond market be more internationally attractive. Time." Jian Hu said.
Foreign capital has increased its holdings for 23 consecutive months. What does the mid- and long-term attractiveness of RMB bonds depend on?
Since the beginning of this year, foreign institutional investors have continued to increase their holdings of RMB bond assets. As of the end of October, they have increased their holdings of RMB bonds for the 23rd consecutive month. According to data released by China Bond Board recently, as of the end of October 2020, the institution has custodial bonds for overseas institutions with a face value of 2,682.676 billion yuan, an increase of 3.3% month-on-month and 48.53% year-on-year.
Treasury bonds and policy financial bonds are the most popular assets by foreign investors. According to Bloomberg data, as the end of September, among RMB bonds held by foreign investors, treasury bonds and policy financial bonds held a monthly holding scale of US
It is worth noting that since the second quarter of 2020, foreign holdings of financial policy bonds have increased significantly, with a year-on-year growth about 60%. Therefore, Bing Li believes that China leads the world in Covid-19 prevention and economic recovery. The investment in policy financial bonds reflects the forward-looking judgment of foreign capital on China's macroeconomic development. At the same time, it is also a natural process for foreign investors to increase investment in policy financial bonds after participating in the government bond market for a period of time.
In the future, the industry generally believes that foreign investors will still maintain a high level of enthusiasm for investment in RMB bonds. Jian Hu said that despite the recent adjustments in the domestic bond market, the enthusiasm for foreign investment has not cooled down, but accelerated the capital inflow, which is driven to a certain extent by the appreciation of RMB exchange rate. In the medium term, as the People’s Bank of China proposes to implement normal monetary policy for as long as possible, it hopes to maintain a normal, upward-slope yield curve. As many countries are sliding towards to a zero or negative interest rates. China’ s monetary policy reflects the determination of Chinese policy makers, and will also make the attractiveness of high interest spread between the domestic and foreign asset in the medium to long term.
The high enthusiasm of foreign capital for RMB bonds is largely due to the huge attractiveness of RMB bond yields. In Bloomberg Barclays Global Aggregate Index, RMB bonds have the highest yield among the top 10 denominated currency bonds.
In addition, in the long run, Jian Hu believes that the biggest challenge that China wil meet in the long term is the problem of population aging. Judging from international experience, as a country’s population ageing problem intensifies, the exchange rate of the country’s currency usually weakens. Therefore, for China, the long-term attractiveness of RMB assets depends on whether it can make good use of its own advantages to overcome the economic structural shock brought about by an aging population.
11月5日，彭博宣布推出彭博巴克莱中国高流动性信用债(Liquid China Credit，LCC)指数，追踪中国银行间信用债市场中以人民币计价的具有较高流动性、可交易的债券。