Bloomberg rolls out index for liquid Chinese corporate bonds

November 6, 2020.
People's Bank of China Deputy Governor Pan Gongsheng speaks during the Bond Connect launching ceremony in Hong Kong. (AP Photo/Vincent Yu)

People's Bank of China Deputy Governor Pan Gongsheng speaks during the Bond Connect launching ceremony in Hong Kong. (AP Photo/Vincent Yu)

Bloomberg on Thursday unveiled the first index geared toward liquid Chinese corporate bonds with investment-grade ratings, a development that comes as it is poised to complete a 20-month transition to add Chinese government and policy bank debt to its Global Aggregate Index, which is a flagship fixed-income benchmark.

The new benchmark is called the Bloomberg Barclays Liquid China Credit (LCC) Index, the company said, adding that it will follow CNY-denominated bonds that are tradable and liquid.

The index is calculated by using three criteria, with one of them incorporating rules from an existing index.

“The LCC Index has been created using the rules of the Bloomberg Barclays China Aggregate Index, but also selects securities based on a combination of China Foreign Exchange Trade System (CFETS) trade volumes and issuer ratings from the three major global rating agencies,” the company said.

The CFETS volumes are among criteria used to form a methodology for including the tradable and liquid portion of the Chinese corporate bond market, Bloomberg said. In order to be counted, Bloomberg said that eligible bonds must have been traded on a minimum of 10% of business days over the trailing period. Additionally, Bloomberg said that bonds must have total trading volume, covering the period, that is worth CNY 250 million ($37.81 million) or higher.

“In addition to the standard criteria of the China Aggregate Index, bonds in the LCC Index must also meet the following criteria: an index rating at issuer level of investment-grade based on at least one rating from the three global rating agencies, non-subordinated, and a maturity of greater than one year at inclusion,” Bloomberg said. “In addition, bonds in the index are held until maturity and the issuers are capped at 10%.”

The company said that the new index will have issues added quarterly and with monthly rebalancing. As of Oct. 30, the index includes 48 issuers and 125 different securities, with a 3.4% average yield and a 1.9 duration; the latter is a measure for bonds’ sensitivity to interest-rate changes, Bloomberg said.

Meanwhile, Bloomberg said that its transition to include Chinese governmental and policy bank debt in its flagship index, which it started in April 2019, is due to wrap up this month.

“In early November, Bloomberg will be the first global index provider to complete China’s inclusion into its flagship index, the Bloomberg Barclays Global Aggregate Index, marking a milestone in the investability of this important bond market. Chinese securities now represent about 6% of the index, and local currency Chinese bonds will be the fourth-largest currency component after the dollar, euro and yen,” the company said.

Liquid Chinese credit bonds are not part of the aggregate index, Bloomberg added.

Bloomberg’s completion for the aggregate index transition comes after fellow index provider Russell said in September that it will include Chinese government debt in its World Government Bond Index starting in October 2021. The change, which FTSE Russell said, will come once market reforms are given a final affirmation in March 2021 and could lead to as much as $150 billion in new inflows for China.

Bloomberg Index Services CEO Steve Berkley said that the new benchmark will help to inform market participants and that it can be used for new financial products.

“We expect that this new index will help market participants better understand the attributes of China’s credit market. Investors and asset managers can use it numerous ways, including in product launches, derivative contracts and traditional benchmarking,” Berkley said in a statement.

E Fund Management Co.’s Hu Jian, who is its chief investment officer for fixed income, said the index will help make the Chinese credit market more open to foreign investors.

“The launch of the LCC Index is a major step towards introducing China’s onshore credit market to global investors, with enhanced access to critical information such as global rating, liquidity and diversification,” the executive said.

-- Additional reporting by Robert Philpot