Bloomberg Asia Pacific Index Product Leader: Chinese bonds have become a long-term foreign investment target

The Paper's reporter Jiang Mengying

Since the beginning of this year, China's credit bond defaults have become more and more normalized.

According to Wind statistics, as of June 30, the scale of credit bond defaults this year has reached 98.573 billion yuan, far exceeding the level of the same period last year. Among them, the overdue principal of the bonds was 91.338 billion yuan, and the overdue interest was 7.235 billion yuan. According to statistics from international rating agency Fitch, in the first half of this year, the amount of Chinese corporate bond defaults reached a record high of 62.59 billion yuan, of which more than half of the default amount of state-owned enterprises reached 36.65 billion yuan.

At the same time, the pace of Integration of China's bond market into the mainstream global market has not stopped.

Bloomberg is the world's first index provider to complete the inclusion of Chinese bonds in its global flagship benchmark index program. Following the full inclusion of Chinese treasury bonds and policy bank bonds in the Bloomberg Barclays Global Aggregate Index, on November 5, 2020, Bloomberg announced the launch of the Bloomberg Barclays China Liquid China Credit (LCC) Index, which tracks the more liquid and tradable bonds denominated in RENMINbi in China's interbank credit bond market.

However, since November last year, China's credit bond market has defaulted frequently and has experienced many market storms.

Has Bloomberg's China Credit Index been hit by risk events? How do international investors view the risk events in China's bond market? Will the opening up of China's bond market be affected? Recently, The Paper conducted a video interview with Zhuang Ji, head of Bloomberg's Asia Pacific Index Products.

Bloomberg Asia Pacific Index Product Lead Zhuang Ji

Under the impact of credit default events, the market value of the LCC index still showed a significant increase

Bloomberg statistics also show some new changes and trends in China's bond market.

Zhuang said that as of the middle of this year, the number of bond defaults in China hit a new high - the size of domestic and foreign bonds that were not repaid on schedule exceeded $25 billion, compared with only $29.9 billion for the whole of last year. Among them, in the first half of this year, the scale of domestic and foreign bond defaults of Chinese real estate enterprises reached US$7.6 billion, accounting for about 30% of the total. Historically, defaults have mainly occurred in the private sector, but at the end of last year, companies such as Yongcheng Coal power and Tsinghua Unigroup also suffered a credit crisis.

However, Zhuang Pointed out that in the context of the increase in credit defaults, Bloomberg's credit debt index has not been affected by these events. The LCC index is based on the deep roots of bloomberg's index business and in-depth knowledge of the market. In the index compilation process, Bloomberg uses the rating of issuers by international rating agencies to screen out the bonds of investment-grade issuers. This is both a more robust approach and a consistent need for investor feedback, which can effectively help investors assess and invest in China's credit bond market and reduce the impact and impact of credit default events.

According to the surging news, the LCC index is based on the same rules as the Bloomberg Barclays China Composite Index, while using the bond transaction amount of the National Interbank Lending Center and the issuer rating of the world's three major rating agencies to determine the bonds that can be included. Specifically, the included bonds should meet the conditions that at least 10% of the trading days have occurred in the past three months and the total transaction amount exceeds $250 million (inclusive).

Bonds included in the LCC Index must not only meet the criteria of the Bloomberg Barclays China Composite Index, but must also meet the following ratings given to the issuer by at least one of the world's three major rating agencies to be investment grade; non-subordinated bonds; and inclusion more than 1 year from maturity. In addition, the included bonds will remain in the index until maturity, with an issuer weight cap of 10%. The LCC index rebalances once a month and the new qualifying bonds are added quarterly. As of October 30, 2020, the LCC index included 125 bonds from 48 issuers, with an average yield of about 3.4% and an average duration of 1.9 years.

Zhuang Ji introduced that in the context of the increase in credit defaults, Bloomberg's LCC index as a whole is still developing in a very good direction, and more investment grade and high liquidity bonds have been added to the index, and the overall market value of the index has also increased significantly. By the end of June, the number of investment-grade issuers included in the LCC had grown from 48 to 54, and the number of bonds had increased from 125 at the time of the index's release to 155, a net increase of 30 bonds, an increase of 24%, for a total of 62 new bonds (and 32 were excluded because they no longer met the conditions of the index). The 62 newly included bonds include 47 new bonds due to the improvement of liquidity indicators, including Sinopec, China Merchants Securities, Poly Real Estate, Jiangxi Railway, etc.; and 15 new bonds due to the issuer's rating reaching investment grade, such as Bohai Bank, Zheshang Bank, Jiangsu Shagang Group and other bonds issued. The overall market capitalization of the LCC index has also increased significantly: from 1.3 trillion yuan at the time of release to 1.8 trillion yuan, an increase of about 40%.

Zhuang Ji concluded that despite a series of credit default events in the market, the LCC index still showed strong resilience, and the overall development trend was also very healthy.

Chinese bonds have become a long-term investment target for international investors

The yields of Chinese bonds have remained relatively high and have a relatively low correlation with other markets, making them one of the better options for foreign investors to diversify their investments.

According to the Bloomberg China Index monthly report, at the end of June, the worst yield (YTW) of the Bloomberg Barclays China Composite Index was 3.17%, significantly higher than the global composite index (1.12%) and the US composite index (1.5%). China's comprehensive investment grade credit bond index yielded 3.5%, the treasury bond and policy bank bond index yielded 3.10%, and the worst yield of LCC also reached 3.24%. China's local currency annual returns also continue to to top the Global Composite Index and the Global Treasury Bond Index.

Zhuang Said there is a consensus among international investors that China's credit bond market is in a relatively early stage, but this has not affected foreign interest in China's bond market. As The yield of Chinese bonds is significantly higher than that of bond assets in other countries, international investors are gradually using Chinese bonds as a long-term investment target in the overall asset allocation, rather than short-term arbitrage.

Zhuang further pointed out that among the bonds of the top 10 currencies of the Bloomberg Barclays Global Aggregate Index, the yield of Chinese bonds is much higher than that of the remaining 9 currency bonds, about 3%,; the second place is South Korea's bonds, which yield about 1.67%. In addition, RMB bonds not only yield very well, but also the correlation between RMB and other assets is low, and international investors can achieve better diversification by buying RMB bonds when allocating assets. The scale of RMB bonds held by overseas investors other than treasury bonds and government bonds (credit bonds, etc.) increased from US$57 billion in October 2020 to US$91 billion, an increase of about 60%, accounting for 16% of the total number of RMB bonds held by foreign investors from 13%.

Credit sinking is a natural development process

Interest rate bonds are still the focus of attention of international investors, and the inflow of policy financial bonds (government and financial bonds) is particularly rapid.

Zhuang Ji said that interest rate bonds accounted for 85% of the total foreign holdings of Chinese bonds, and the surge in foreign inflows of government and financial bonds began in the second quarter of last year. From the second quarter of last year to the fourth quarter of last year, foreign capital increased its holdings of government and gold bonds by 85%, while foreign government bonds increased by 45%.

Zhuang Ji believes that credit sinking is a very natural development process. When industry investors have more understanding of the Chinese market, they will naturally gradually expand from treasury bond investment to government and financial bond investment, and then to credit bond investment. This is also the original intention of Bloomberg to choose the timing of the release of the LCC.

Zhuang Ji concluded that since the release of the LCC index, although there have been a series of credit default events in the market, investor confidence will be affected to a certain extent, but the increasing attention to the LCC index, many investors still recognize the attractiveness of Chinese bonds.

Finally, Zhuang Ji also pointed out the shortcomings of the current Chinese credit bond market and his expectations: first, although more highly liquid bonds have joined the LCC index, which is a good trend, but credit bonds are still lacking in liquidity compared with interest rate bonds, and hope to see more improvements in the liquidity of credit bonds in the future; second, the current coverage of domestic issuers by international rating agencies is not sufficient, and the coverage ratio needs to be further improved; third, In the past few years, the deepening of foreign institutional investors' understanding of China's bond market is an important driving factor for their increasing Chinese bond holdings, and as far as the credit bond market is concerned, there is still a relatively large gap in the understanding of foreign investors, and domestic institutions and market participants can strengthen communication with foreign investors through various forms, and form a good feedback mechanism to help them reduce "fear from the unknown" and enhance investment confidence.

Editor-in-Charge: Zheng Jingxin

Proofreader: Ding Xiao