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News Analysis: Bloomberg new indices point to growing investor confidence in China's financial market

Xinhua, March 2, 2017 Adjust font size:

Bloomberg became the first index provider to include China bonds in its global indices offering on Tuesday, a significant step that reflects international investors' increasing confidence in China's financial market as it becomes more accessible and attractive.

"Financial markets have been one of the areas where the pace of China's reforms has been fastest," Bloomberg Chief Asia Economist Tom Orlik told Xinhua, adding that moves like interest rate liberalization were already playing a significant role in improving the allocation of credit.

Bloomberg said Tuesday night that the decision to create the new hybrid China fixed income indices was due to the increasing accessibility to China's bond market for international investors.

It was also based on Bloomberg's ongoing global index review and governance process, including investor feedback from the company's Index Advisory Council meeting in November 2016, Bloomberg said in a statement.

One of the new indices, Global Aggregate + China Index, incorporates onshore Chinese government bonds into Bloomberg's flagship Global Aggregate Index.

It currently includes 18,386 member securities with a market value of 48.45 trillion U.S. dollars, among which there are 151 China Treasury bonds and 251 bonds issued by Chinese Policy Banks. The market weight of Chinese yuan is 5.31 percent, ranking fourth after the U.S. dollar, Euro, and Japanese Yen.

"Before we made our announcement, we met with between 100 and 150 different organizations to get their feelings and feedback on this," Steve Berkley, Global Head of Bloomberg's Index Business, told Xinhua.

"There was a lot of interest in these new indices and of course in terms of whether China will ultimately be included in the official index," he said.

However, Berkley said the RMB-denominated bonds are currently not eligible for inclusion in the benchmark Global Aggregate Index yet.

"We think it is a good first step to get the investors comfortable with the markets and give them a sense of what the indices' risk profile and what the performance would be if China were to be included," Berkley said.

He said that Bloomberg created a parallel index covering China bonds while also maintaining its current, RMB-free global benchmark because it does not want to force investors to make a choice.

"Global investors need to efficiently hedge their currency using onshore forward rates and interest rate swaps. Rules on taxation need to be clarified. And investors seek a track record to confirm that recent reforms will remain in place when the markets hit turbulence," said Berkley.

While pointing to a promising outlook of China's financial market, experts also took note of challenges facing China.

"We anticipate that the Chinese government will continue to introduce changes to further improve investment environment and boost investor's confidence. We've seen many positive changes already, and we believe there will be more to come," said Berkley.

Orlik said China still has room to grow. But at the same time, risks from high leverage levels are a growing focus of concern for the markets.

"Short term, China has the growth momentum and policy space to avoid a hard landing. Long term, increasing the efficiency of lending and investment will be critical," Orlik said.

"Our view is that greater integration and transparency in financial markets can play an important role in achieving that goal," he added.

Another new index Bloomberg launched is EM (Emerging Market) Local Currency Government + China Index, which combines the EM Local Currency Government Index and treasury component of the China Aggregate Index.

The EM Local Currency Government + China Index is a market capitalization-weighted index. The index has 616 member securities including 151 China Treasury bonds. China bonds weigh 39.10 percent in the index.

In addition to the two new indices, Bloomberg has also updated the China Aggregate Index, which was first introduced to the market in 2004. Endit