FTSE Russell eyes China’s corporate credit

By Chu Daye Source:Global Times Published: 2019/3/14 21:53:40

Foreign investors can be new source of capital

Photo: VCG

The potential review of the inclusion of Chinese corporate credit into leading global indexes is a natural consequence of global investors' rising interest in the Chinese capital market, Chinese asset managers and analysts said on Thursday.

The eventual inclusion will improve the Chinese debt market structurally and bode well for the yuan's internationalization drive, they said.

The comments came after Bloomberg reported on Thursday that FTSE Russell may this year begin a formal review on whether to include Chinese corporate credit to its World Broad Investment-Grade Bond Index.

FTSE Russell is working on a separate review due to be announced in September on its decision with regard to include Chinese local-currency government bonds in its flagship World Government Bond Index, a benchmark gauge of sovereign debt.

Li Huiyong, an executive with Shanghai-based Hwabao WP Fund Management Co, told the Global Times on Thursday that the potential inclusion of Chinese corporate debt, following that of government debt, is "a natural consequence of global investors' interest in the Chinese capital market."

"Here, the situation is not much different from what is happening in the equity market," Li said.

More global index providers for equities have included or increased the weight of Chinese shares. The trend is seen by some as a factor in the bullish stock market performances in Shanghai and Shenzhen this year. The benchmark Shanghai index is up 20 percent year-to-date.

For various reasons, foreign investor participation in the Chinese bond market, the world's third-largest, is just 3 percent, whereas the global average is about 15-20 percent, according to Li. 

"The index compiler is just doing what its clients want, as they are increasingly attracted to the Chinese bond market," Li said. 

The reported work on the inclusion of Chinese corporate bonds "showed global investors are increasingly recognizing Chinese corporate bonds as a worthy asset class, a step forward as they move from government bonds."

As of the end of January, China's outstanding bond market was worth 87.5 trillion yuan ($13 trillion) with 14.4 trillion yuan worth of treasuries and 19 trillion yuan worth of corporate credit, according to a People's Bank of China report released in February. 

More global index compilers are in the process of including bonds from China. 

Bloomberg Barclays, another major index benchmark, is due to begin adding Chinese bonds to its Global Aggregate Bond Index in a 20-month inclusion period beginning in April 2019. JPMorgan Chase & Co has also placed Chinese bonds on watch for inclusion in its indexes.

FTSE's World Government Bond Index could influence some $1 trillion worth of global capital in passive vehicles and an estimated additional $1 trillion to $3 trillion managed by active investors, according to the Bloomberg report.

"Global investors are increasingly attracted by China's contribution to and influence on global economic growth and the fast pace at which the Chinese bond market grows," said Liu Min, an analyst with brokerage FXTM China.  

In the Government Work Report this year, the Chinese government made it clear that it will further improve opening-up policies in the bond market. This process has been in progress since last year.

"Such words signaling regulatory directions have removed psychological obstacles for index providers such as FTSE Russell and global investors," Liu said. 

Impact on China

Increased foreign capital in the nation's bond market will help boost the yuan and provide more support to the Chinese private sector, analysts said.

Li said in the long run, increased participation by foreign investors could constitute a new source of capital, greatly improve the price-discovery function of the Chinese bond market and optimize the structure of this market.

"A better Chinese bond market will be conducive to the rising global influence of the yuan and the currency's internationalization drive as global investors put assets into yuan-denominated bonds," Li said.


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