Bloomberg Launches Index for Chinese Bonds That Foreign Investors Usually Avoid

Bloomberg's headquarters in New York, U.S.

Bloomberg on Thursday announced the launch of a new index to make it easier to invest in a $7 trillion chunk of China’s bond market that foreign investors have generally been reluctant to get involved with.

The launch of the Bloomberg Barclays Liquid China Credit Index (LCC Index) comes at a time when foreign interest in Chinese debt securities is growing, though most of the investment so far hasn’t been in credit bonds, despite the fact they account for 39% of China’s 114 trillion yuan ($17 trillion) bond market (link in Chinese), according to Bloomberg.

The index aims to track highly liquid and tradable yuan-denominated credit bonds — those issued by companies, local governments and financial institutions that aren’t policy banks — and is expected to bring in more overseas capital to the onshore Chinese debt market.

Following the addition of Chinese government and policy bank bonds to another one of Bloomberg’s indexes earlier this month, the launch of the LCC Index marks an important step toward establishing broader transparency and accessibility in China’s credit market, which will help global investors understand it better, said Steve Berkley, CEO of Bloomberg Index Services Ltd.

Foreign investors have flocked to buy Chinese state-backed bonds amid the country’s efforts to open up its massive bond market, but have shown far less interest in credit bonds, whose value is mainly based on the creditworthiness of issuers.

By the end of October, Chinese government bonds ranked first among all overseas-held interbank bonds. Overseas holdings of Chinese government bonds stood at 1.73 trillion yuan, accounting for 57.7% of all overseas-held interbank bonds, according to central bank data (link in Chinese).

Global investors are still cautious about holding Chinese credit bonds, mainly because they don’t know much about them or their issuers because there isn’t a mechanism for bond issuers and investors to interact and communicate, said Hu Jian, chief investment officer for fixed income at asset manager E Fund Management Co. Ltd. The majority of the bonds have not been rated by any global ratings agencies, he said.

In addition, the country’s fragmented interbank and exchange bond markets operate separately and are overseen by two different regulators, making it difficult for overseas investors to get access, Hu said at a Bloomberg press conference Thursday.

Meanwhile, corporate bond defaults have continued to rise in China, further fueling investors’ concerns about companies’ ability to repay debts. Defaults on corporate bonds are expected to increase in the second half of this year amid the global economic slowdown and fallout from the Covid-19 pandemic, global ratings firm Fitch Ratings Inc. said.

In response to concerns about the thin liquidity in China’s bond market, Bloomberg said the LCC Index will only include bonds that have been traded on at least 10% of the business days over the past three months, with at least 250 million yuan in total trading volume. This can ensure bonds tracked by the index can trade at a large scale continuously, Zhuang Ji, Bloomberg’s Asia-Pacific head of indices, said at the press conference.

As of Oct. 30, the new index consisted of 125 bonds that have an average yield of 3.4% and duration of 1.9 years, far exceeding the yield on 10-year U.S. government bonds, which is hovering around 0.8%. More than half of the bonds included in the index were issued by banks, data from Bloomberg showed.

Among foreign institutions, there is growing interest in bonds issued by Chinese banks, according to a source at one such institution. “Usually, lenders have already been rated by global ratings agencies, they are relatively well-known, and their bond yields are also competitive in the global market,” the source told Caixin.

As the world’s second-largest economy is quickly recovering from the pandemic, its yuan-denominated bonds with relatively high yields are expected to remain appealing to foreign investors, multiple analysts said.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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