J.P. Morgan Places Chinese Bonds Under Review for Including in Index

J.P. Morgan Places Chinese Bonds Under Review for Including in Index

J.P. Morgan Places Chinese Bonds Under Review for Including in Index : top news J.P. Morgan Places Chinese Bonds Under Review for Including in Index update daily

J.P. Morgan Chase & Co. has placed the $2.2 trillion Chinese onshore government bond market under review to decide whether it will add it to its widely tracked emerging-market bond index.
Adding China’s government bonds to the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified Index could automatically direct billions of dollars into the country’s yuan-denominated bond market, as the index is tracked by investors managing an estimated $180 billion of assets, according to the bank.
J.P Morgan’s announcement came after China’s recent move to further open up its previously restricted government bond market to more types of foreign investors, including commercial banks, insurance companies and asset managers.
“China will be placed on Index Watch as we continue to review China’s eligibility for potential inclusion into the (index),” the bank said in a release early this week, without setting an exact date for such a decision.
China’s onshore bond market is the third largest in the world, second only to the U.S. and Japan. However, it is a nascent market as the majority of the bonds have been issued by the government and policy banks, while Chinese companies are heavily reliant on bank loans.
Until recently, the Chinese government has kept the domestic bond market largely off-limits to foreign investors in an effort to retain its control over capital accounts and borrowing costs, with rules set around quotas and capital movements.
Yuan-denominated government debt totaled $2.16 trillion as of September, up 12% from a year earlier, according to the Bank for International Settlements.
As of last November, foreigners owned only 1.6% of outstanding local bonds in China, compared with 30% to 40% of bonds in countries such as Indonesia and Mexico, according to Ashmore Group, an investor in the Chinese local bond market.
In a surprise announcement on Feb. 24, the People’s Bank of China removed the quotas that had until now restricted access to foreign institutional investors to its bond market.
The central bank also allowed foreign investors to trade in the highly liquid interbank market or between financial institutions, not just in the exchange-traded bond market. These steps were largely regarded as China’s efforts to counter the massive capital outflows that have put downward pressure on its currency.
J.P. Morgan, a major provider of emerging-market bond indices, said it is still awaiting official procedural details to determine whether the changes satisfy the inclusion rules, such as the required holding period of foreign currencies and the monthly repatriation schedule.
“We’re waiting to see what the policy changes mean in practice, for both foreign investors and those that are benchmarked to the J.P. Morgan GBI-EM indices,” said Gloria Kim, head of global index research at J.P. Morgan, in an interview.
Separately, the Wall Street bank also launched an Asia-focused bond index on Thursday as a result of growing appetite from investors toward Asian fixed-income products, Ms. Kim said. China isn’t included in the global index.
In the event of an inclusion, China would attain the maximum index weight of 10% due to the hefty size of the market, J.P. Morgan said. Though any inclusion of China’s local debt will be a gradual process, it would eventually lead to a reduction of the weight for many other countries that are currently included, such as Thailand, Malaysia and Hungary.
Still, many foreign investors remain wary of entering the Chinese market, citing the low bond yields and the uncertainties around the currency and market access.
“For foreign investors, we need to gain a higher degree of confidence in the stability of the local regulations in China before one could allocate material amount of capital to that market,” said Peter Fitzgerald, head of multi-assets at Aviva Investors,  which has £290 billion of assets under management.
He said the government’s aggressive interventions in the aftermath of the stock market crash last year raised questions over the ability for foreign investors to exit the Chinese market, if they need.
The yield on China’s benchmark bonds is currently at 2.8%. While the yield is higher than the negative and near-zero yields in many developed markets, it isn’t sufficient to compensate the perceived downside risk in the currency, said Luca Paolini, chief strategist of Pictet Asset Management, with $185 billion of assets under management.
Though the Chinese yuan has stabilized in recent days, many investors still believe the currency would fall in the future given the country’s slower economic growth.
“It’s one of the things you would buy if you’re very optimistic on China, and I don’t think now is the right time to buy,” Mr. Paolini said.
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