See no evil, hear no evil…
Perhaps that’s the investing motto of the cash piling into the new Bloomberg Barclays Liquid China Credit Index, an offshore index that aims to track “investment grade” corporate bonds in China, despite the opacity of the country’s credit market.
The index was launched last week, according to FT, and is “designed to track the liquid, tradable portion of onshore renminbi-denominated credit bonds.”
Bloomberg has claimed that the index could help market participants “better understand” China’s credit market, which has virtually no ETFs or indices offshore that track its corporate bonds.
Steve Berkley, chief executive of Bloomberg Index Services, said: “Investors and asset managers can use [the index in] numerous ways, including in product launches, derivative contracts and traditional benchmarking.”
He continued: “With government and policy bank securities now fully phased into the Global Aggregate Index, the Liquid China Credit Index is an important step towards establishing broader transparency and accessibility into China’s credit markets”.
Ji Zhuang, Asia-Pacific head of indices at Bloomberg said: “We have had global ETF issuers expressing interest in launching products tracking the China credit index, whether that is the LCC [index] or custom versions of the index, to suit their needs,”
China’s credit market is somewhat of a black box. About 70% of all Chinese companies don’t have ratings from global rating agencies. Of the ones that do – like one domestically AAA- rated, state backed coal company that recently defaulted on its debt – the ratings don’t seem to mean much.
To try and offset the notoriously risky credit market, the Bloomberg product “selects bonds that have traded on at least 10 per cent of the business days over the past three months and have at least Rmb250m ($37.8m) in aggregate trading volume over that period.”
The index contained 125 securities from 48 government and corporate issuers, as of October 30. The average yield of products in the index was 3.4% and the average duration was 1.9 years.
Jian Hu, senior managing director of fixed income at Guangzhou-based E Fund Management, told FT: “From our conversations with offshore investors, most of them have not yet been convinced to invest in China credit bonds.”
Despite this, in the first 9 months of 2020, offshore holdings of Chinese onshore bonds are up 38% from the end of 2019.
“Signs are positive that we are seeing, for example, international managers setting up local credit funds operations, which will help drive the activity and liquidity of this market,” he concluded.