FTSE Group will by June this year launch its first-ever index that tracks onshore yuan-denominated bonds, amid growing global demand for investment products linked to the best-performing Asian currency.
The UK-based index provider will compile a broad-based, tradable index that factors in as many as 100 sovereign notes listed on the mainland, before developing it into a range of sub-indexes, FTSE Asia managing director Jessie Pak told the Hong Kong Economic Journal’s EJ Insight.
FTSE’s move marks a swift march into the more liquid domestic bond market after its October launch of the FTSE-BOCHK offshore renminbi bond index series tracking the so-called dim sum bonds. It follows pioneering steps taken by entities such as Standard & Poor’s and Shanghai-based China Securities Index Co. Ltd. to draw benchmarks for the country’s US$4.9 trillion fixed-income market.
“We see demand from international investors for such tools as they try to enhance their China exposure,” Pak said in an interview in Hong Kong.
“China’s prospects are widely believed to be optimistic, particularly after the Third Plenum meeting,” she said, referring to the Communist Party Central Committee’s key policy gathering in November last year.
China’s bond market had been closed to outsiders over the years. It wasn’t until 2012 when China opened to qualified foreign institutional investors (QFIIs) the interbank bond market, which trades over 90 percent of the nation’s debt. Before that, foreign investors were limited to exchange-traded bonds.
“China’s fixed-income market is huge but we’ve barely looked into it,” said Pak, whose company is the provider of flagship gauges such as FTSE 100 of London-listed large-caps and FTSE China A50 that makes up 72.2 percent of all Hong Kong-listed A-share exchange-traded funds. “It’s time we move beyond equities.”
In November, Beijing unveiled a raft of policy reforms after the party summit. Authorities pledged to free up interest rates further, brightening the prospects of the bond market, as opposed to traditional bank loans that cater to state-owned enterprises.
Best Asian currency
China’s renminbi rounded out 2013 with a 2.9 percent gain against the US dollar, outperforming all its Asian peers. Meanwhile, the Shanghai benchmark stock index closed up 0.9 percent at 2,115.98 on Dec. 31, trimming losses in 2013 to 6.8 percent. Investors are regaining confidence in Chinese assets amid recovery signs in Asia’s biggest economy.
But the Federal Reserve’s newly-initiated exit from its quantitative easing may cause the story to reverse. Emerging markets are bound to suffer capital outflows as the US begins tapering its monthly bond purchases by US$10 billion to US$75 billion from January.
“Repeated episodes of tapering scares on equity and currency markets in [Asia] could well occur in 2014,” Invesco Ltd., which manages US$767.3 billion of assets worldwide, said in a Dec. 23 research note. “However, the economic fundamentals of Asia Pacific, excluding Japan, generally remain intact and are likely to be able to withstand the retreat of easy liquidity.”
FTSE’s proposed index on onshore bonds will focus on government debts since global institutional investors are required to buy debt instruments which are liquid enough and carry ratings in line with international standards.
It may become benchmarks for compilation of index-linked products to QFIIs and RQFIIs that invest in onshore securities with the US currency and the Chinese currency respectively, Pak said.
Offshore, the company will launch a sub-index tracking high-yield dim sum bonds in the first half, adding to its present list of indexes covering offshore sovereign and investment grade yuan-denominated debts.
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