Investors to Leap over Obstacles as China Bonds Go Global

Expert Insights from Asset Servicing Live Webcast Series 

Investors to Leap over Obstacles as China Bonds Go Global

Expert Insights from Asset Servicing Live Webcast Series 

June 2019

By Magdalene Tay

With Chinese government bonds and policy bank bonds now included in a widely tracked global bond index, China’s bond market has taken an evolutionary leap. Have investors leapt, too?

On April 1, 2019, the first batch of yuan-denominated securities was added to the Bloomberg Barclays Global Aggregate Bond Index.
 

A total of 356 Chinese securities met the two key eligibility requirements on the day, with at least US$5 billion in outstanding debt and more than one year to maturity. Going forward, all China bonds in the Index and the wider China market will be assessed on the last day of every month to recapture those that meet the Index eligibility criteria.
 

Initially, each eligible bond was included in the Index at a 0.05 factor of its outstanding amount. This factor will increase by 0.05 each month for 20 months to allow for a gradual phase-in of the China securities. This will see full inclusion for China bonds in November 2020 as the culmination of an effort that began in 2016.
 

Nicholas Gendron, Fixed Income Index Product Manager at Bloomberg, explained, “Throughout the past three years, we’ve been on a journey in terms of gathering client feedback, working through our governance process, and engaging with policymakers in China. In the end, we felt that a very gradual but consistent phase-in would be the best overall solution for investors and the China bond market, since it avoids the sudden inclusion of the equivalent of US$3 trillion of debt in the Index, which would have put a lot of stress on the marketplace.”

Investors embrace China bonds

 

Even though the China bond inclusion process is still at an early stage, Bloomberg has noted that most foreign investors are already moving ahead with the standard benchmarks that include China bonds.
 

“Foreign investors are definitely at varying degrees of readiness, but the majority have decided that China is investable and understand that they have to work through a few obstacles at this initial phase,” Mr. Gendron said.
 

On the other hand, some foreign investors have opted to exclude China bonds for now and some have decided to proceed more cautiously and include China in their investment process through customized benchmarks instead of the standard Index.
 

Obstacles to participation in China’s bond market range from investor concern about overall liquidity and transaction costs to challenges around getting set up to use Bond Connect or China Interbank Bond Market (CIBM) Direct. From an entry perspective, burdensome documentation and complex processes are hurdles that will need to be relaxed in the future.
 

“For example, it currently takes more than two weeks to open the necessary segregated accounts with the Chinese Central Depository and Clearing and the Shanghai Clearing House. Our clients are telling us that a shorter and simpler process for opening these local market accounts would be very helpful,” said Patrick Ludden, BNY Mellon’s Cash, Foreign Exchange and SWIFT Product Manager, Global Product Management, Asset Servicing.
 

“Additionally, as all investors are aware, we have to deal with the co-existence of CNY** and CNH** without an official ISO currency code for both. This puts a lot of pressure on foreign investors and providers to create funding procedures to support and segregate offshore CNH and onshore CNY funds,” he continued. “Plus, from a CIBM Direct perspective, there is a requirement to ensure that the ratio of foreign currency to Renminbi (RMB)** in terms of accumulated outward and inward remittance stays within a range of plus-or-minus 10% of each other.”
 

End-to-end solutions ahead

 

Even so, these obstacles can be overcome, and the market is gradually moving toward greater efficiency.
 

Following Bloomberg’s decision to include China bonds in its Aggregate Index, this year is also likely to see FTSE Russell considering whether to add China bonds to its World Broad Investment-Grade Bond Index. JPMorgan has also placed China bonds on watch for inclusion in its JPM GBI-EM Diversified and EMBI Global Diversified indexes.
 

As to whether Bloomberg will add corporate bond issuers to its indexes, Mr. Gendron pointed out that Bloomberg has been tracking the wider market via its China Aggregate Index since 2004 and it continues to analyse the full market as it evolves with an eye on its liquidity and the accessibility of these other issuers. “It is a matter of when, not if, but it is a longer-term process for the rest of the market to be included in a broader-based index,” he said.
 

BNY Mellon’s plans include extending FX services to provide an end-to-end solution for clients accessing the China’s bond market. “For Bond Connect, we offer a full suite of FX and funding services for both CNH and onshore CNY. For CIBM Direct, we support CNH for FX and funding. For CNY, we support funding only as CNY has to be done through local custodian. As we look ahead, we plan to offer onshore CNY in the offshore market”, Mr. Ludden revealed.

BNY Mellon FX and Funding Services

BNY Mellon FX and Funding Services

Magdalene Tay

APAC Custody Product Manager, BNY Mellon Asset Servicing


 

¹Regulation 159 permits foreign investors to execute onshore CNY in offshore market via RMB clearing or participating banks. BNY Mellon is reviewing the FX and funding processes.

²Restricted to local custodian and direct arrangement between the local custodian and client for FX dealing relationship.

³FX Direct Dealing. Client must instruct BNY Mellon to move cash from their relevant offshore CNY account to the onshore CNY.

⁴Sovereign entities can transfer CNY from another onshore commercial bank.

⁵Strictly prohibited for onshore CNY trading due to market requirements.

** The ISO code for Renminbi (which may also be used for yuan) is CNY, (an abbreviation for Chinese Yuan), and also used for CNH which is CNY traded in offshore markets such as Hong Kong.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorised and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 240 Greenwich Street, NY, NY 10286 USA, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, a subsidiary of The Bank of New York Mellon, and operating in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, operating in Ireland through its branch at Riverside 2, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, D02 KV60, Ireland, trading as The Bank of New York Mellon SA/NV, Dublin Branch, which is authorized by the ECB, regulated by the Central Bank of Ireland for conduct of business rules and registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. The Bank of New York Mellon (International) Limited is registered in England & Wales with Company No. 03236121 with its Registered Office at One Canada Square, London E14 5AL. The Bank of New York Mellon (International) Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. If this material is distributed in or from, the Dubai International Financial Centre (DIFC), it is communicated by The Bank of New York Mellon, DIFC Branch, (the “DIFC Branch”) on behalf of BNY Mellon (as defined above). This material is intended for Professional Clients and Market Counterparties only and no other person should act upon it. The DIFC Branch is regulated by the DFSA and is located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. BNY Mellon also includes The Bank of New York Mellon which has various subsidiaries, affiliates, branches and representative offices in the Asia-Pacific Region which are subject to regulation by the relevant local regulator in that jurisdiction. Details about the extent of our regulation and applicable regulators in the Asia-Pacific Region are available from us on request. Not all products and services are offered in all countries.
 

The material contained in this document, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. The contents may not be comprehensive or up-to-date, and BNY Mellon will not be responsible for updating any information contained within this document. If distributed in the UK or EMEA, this document is a financial promotion. This document and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. Similarly, this document may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this document comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this document in their jurisdiction. The information contained in this document is for use by wholesale clients only and is not to be relied upon by retail clients. Trademarks, service marks and logos belong to their respective owners.
 

BNY Mellon assumes no liability whatsoever for any action taken in reliance on the information contained in this material, or for direct or indirect damages or losses resulting from use of this material, its content, or services. Any unauthorised use of material contained herein is at the user’s own risk. Reproduction, distribution, republication and retransmission of material contained herein is prohibited without the prior consent of BNY Mellon.
 

© 2019 The Bank of New York Mellon Corporation. All rights reserved.

 

Ready to grow your business? Speak to our team.