Data and trading tools provider IHS Markit is considering adding Chinese corporate bonds to its iBoxx ChinaBond indices. 

The iBoxx ChinaBond indices currently only include government and policy bank bonds. Randolf Tantzscher, executive director for indices at IHS Markit, tells WatersTechnology that the provider is looking at how it could add a Chinese corporate component to its offering. 

“It’s natural to start with government and policy bank bonds, because I think that’s the first port of call for any investor new to the market—to look at that part of the market that doesn’t have any domestic credit risk—which is why, if you look at the holdings onshore today, you can see that about 98% or so from a foreign investor perspective are in those asset classes,” he says. “And at the same time, we are actively looking at what and how to build out, or add, a corporate component to that index.”

He adds that more active and bigger clients in the region, as well as in Europe, are starting to look beyond government bonds and policy banks. 

Hurdles Remain

There are, however, specific challenges that stand in the way. Tantzscher notes that liquidity, particularly in the corporate bond space, is a concern—but adds that in that regard, China is no different compared to other Asian markets. 

I think that’s definitely the key challenge—how to measure and express credit risk and reflect it in the index rules—that we see in our discussions with clients.

Randolf Tantzscher

“I think in terms of looking at how to identify the investable universe, in that sense, it’s making sure that what you include in the index is actually trackable from a performance perspective. I think that’s the first key challenge we face,” he says. 

Another challenge is from a credit risk perspective. Right now, investors lack the data to measure and identify credit risk in the China market, which makes them uncomfortable.

Up until a few years ago, defaults in the corporate bond market were a rarity. However, defaults on corporate bonds for the first six months of 2019 totaled about 60 billion yuan ($8.39 billion). For the full year in 2018, corporate bond defaults stood at 116.6 billion yuan ($16.3 billion) while for 2017 they stood at 33.7 billion yuan ($4.71 billion), according to Chinese data provider Wind. 

“So in terms of understanding the credit risk, and how credit risk is being priced, and being able to say with confidence, ‘Well, this is an investment-grade corporate bond index,’—I think that’s the other challenge that you face,” he says. 

There is still a learning process onshore due to the relatively short time period that has elapsed since the first domestic default. “But I think that’s definitely the key challenge—how to measure and express credit risk and reflect it in the index rules—that we see in our discussions with clients,” he says.

Ratings

There are a few ways to approach the Chinese onshore bond market, particularly when trying to include it in an index. While IHS Markit is still exploring how and what it will be like to add a corporate component to its suite of iBoxx ChinaBond offering, Tantzscher says one discussion point is the extent to which international ratings provided by Fitch, Moody’s and S&P should be used in the construction of a China corporate bond index. 

“Domestically in China, there have been a number of developments where organizations have created their own implied or derived ratings,” he says. For example, IHS Markit’s partner in China—China Bond Pricing Center (CBPC), which IHS Markit partnered with to launch the iBoxx ChinaBond indices in October 2018—calculates an implied rating based on the valuations for every issue in the market, he adds.

However, since that aspect needs more time and exposure, he says using international ratings may deliver a better tradeoff at the moment than using domestic ratings.

“Obviously, if someone is a true China specialist, they will have to learn to look at domestic ratings, but I think for the regular investors, that’s probably very hard because, ultimately, you’d have to hire your own credit analyst to cover all the names you’d want to buy in-depth if you purely relied on domestic ratings at this stage,” Tantzscher says.

CBPC is a subsidiary of China Central Depository and Clearing (CCDC), a state-owned financial institution that provides central registration, depository, and settlement services. 

CBPC’s data is used by more than 1,000 market participants, including domestic insurers, funds, and securities companies, as well as a majority of China’s domestic banks. The partnership integrates CBPC’s data and expertise of the local bond market with IHS Markit’s index framework, providing a platform for CBPC to internationalize its data and raise its profile globally and domestically. Also, it allows foreign investors to understand the Chinese bond market within the IHS Markit iBoxx framework that they are already familiar with.