Amid trade tensions and stock turmoil, China cracks open its bond market further to foreigners

In a step toward wooing more overseas investors, China’s main publisher of bond market data and London-based IHS Markit announced Friday new indexes that claim to offer more transparency into the world’s third-largest fixed income market.

ChinaBond, a subsidiary of state-owned China Central Depository and Clearing, is the main source of pricing data on mainland Chinese bonds. IHS Markit is behind the widely followed iShares iBoxx High Yield Corporate Bond ETF (HYG), PMI reports on economic growth, short interest data and other market-related publications.

The launch of the iBoxx ChinaBond Government and Policy Banks Bond Indexes on Friday comes as China is working to get mainland bonds added to global benchmarks from Bloomberg and Barclays, J.P. Morgan and Citi. Last year, China launched a bond connect that gives international investors access to mainland bonds through Hong Kong. Analysts saw the late August implementation of a real-time settlement system in Bond Connect as a step toward inclusion.

Foreign investment in the $12 trillion mainland Chinese bond market is only about 2 percent, according to IHS Markit. Increasing overseas participation in yuan-denominated assets would help Beijing toward its goal of boosting international acceptance of the Chinese currency, also known as the rmb.

The preparation and publication of the iBoxx ChinaBond indexes marks yet another successful milestone in the efforts of China Central Depository and Clearing and ChinaBond Pricing Center to open up the country’s bond market and strengthen the international pricing power of yuan-denominated assets, Bai Weiqun, chief supervisor of the clearing center and chairman of ChinaBond, said in prepared remarks for a Friday afternoon launch event in Shanghai.

Bai added the indexes are the first yuan-denominated mainland Chinese bond indexes with a global brand.

IHS Markit will maintain the main index and its 48 sub-indexes in compliance with the International Organization of Securities Commissions and European Benchmark Regulation standards, according to a release.

“What we are in the process of doing now is then getting investors to sign up to launch funds, ETFs [based on the indexes],” Shane Akeroyd, president of IHS Markit Asia, said in a phone interview with CNBC. “We expect that take up to be significant.”

“This is a first of a whole series of things we’re going to be doing with ChinaBond,” Akeroyd added, noting IHS plans next to develop indexes for Chinese corporate bonds.

Bloomberg plans to include yuan-denominated government and policy bank securities in its Bloomberg-Barclays Global Aggregate Index starting next year, and other major indexes could soon follow.

“We expect over $200bn USD of passive inflows into Chinese bonds after inclusion into three global indices,” Eric Liu, portfolio manager at BlackRock’s Asia credit team, said in an email.

Liu noted that Chinese onshore bonds are attractive to foreign investors for their very low correlation with other bond markets, but tools for hedging investment risk are limited right now.

Foreign investors may also be wary of putting their money into a currency that has fallen more than 6 percent versus the U.S. dollar this year. The relative attractiveness of the yield on the Chinese 10-year sovereign bond versus the 10-year U.S. Treasury has narrowed to 40 basis points from 150 basis points earlier this year, Macquarie’s Larry Hu pointed out in a note Thursday.

But IHS’s Akeroyd said most international investors the company has spoken with see Chinese bonds as becoming a growing part of portfolios in the long term.

“Short term if the [yuan] depreciates, it will make Chinese bonds more attractive because they become less expensive for investors using dollars,” Akeroyd said. “If currency depreciation is extended, or during market distress periods, correlation between bond prices and the currency may turn positive as investors’ expectations move toward higher rates.”

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