The Chinese bond market, currently the third largest in the world, took a major step forward this March when Bloomberg announced the inclusion of over 300 bonds issued by policy banks and the government into its Bloomberg Barclays Global Aggregate Bond index, starting in April 2019.
However, there remains a fundamental imbalance between government and corporate bond markets in China, as in the rest of Asia, delegates heard at an AsianInvestor event this month in Singapore.
“While we believe that Chinese government bonds are going to be an important part of global bond portfolios, the corporate bond market onshore is still not well developed,” said panellist Liew Tzu Mi, chief investment officer for fixed income at Singapore sovereign wealth fund GIC.
A key impediment, noted panellists at the discussion jointly organised with State Street Global Advisors (SSGA), was the challenge facing investors when trying to evaluate the credit profiles of different issuers. Compared with more developed markets in the US and Europe, the market is still immature, David Chua, head of investment strategy for insurer Prudential Assurance Company Singapore, agreed.
It is a particular challenge in China where onshore corporates are rated AAA but there is very little credit spread differentiation, GIC’s Liew said.
“The part which I feel needs to be really tested, and we’re starting to see some stresses in the Chinese market, is when the defaults come into play and the credit ratings are being scrutinised – that’s when you will really see the next step up in the development of this market,” Prudential’s Chua said.
Other tender points that remain to be tested include creditor protection, the legal framework for governing standards, and asset quality, Liew said.
On the plus side, the growing exposure of Chinese companies to the demands of offshore global markets would likely spur long-term improvements onshore, she added.
“The development and maturity will come as we see more of the corporate sector tapping the bond markets,” Chua agreed.
REST OF ASIA
Corporate bond markets elsewhere in Asia also face a challenge to attract foreign investors, even though they are already enthusiastic buyers of sovereign debt.
Some 40% of Indonesian government bonds, 30% of Malaysia government bonds and 20% of Taiwanese government bonds are owned by foreign investors, Kiyoshi Nishimura, chief executive of the Credit Guarantee and Investment Facility (CGIF), told the audience.
That shows foreign investors have reasonably good access to local currency government bonds and are willing to take currency risk, he said.
What’s really missing is their presence in corporate bond markets, Nishimura said, noting that only 8% of corporate bonds in Indonesia are foreign owned, for example.
“We need to think about how we can encourage more foreign investors to come to corporate bond markets,” he noted.
A key issue is that of liquidity, or rather illiquidity, which in some respects is inevitable: the supply of Asian bonds is limited because the region's capital markets are still in the process of opening up.
But as panellists said at the same event, the problem is exarcebated by Asia's bank-dominated lending practices and the buy-and-hold investment approach of domestic investors.
Greaer diversification of investors is key for the opening up of the corporate bond market, Nishimura said.
INFORMATION AND HARMONISATION
A lack of familiarity with local bond markets is another hurdle in the way of overseas investors.
“The typical kind of challenge for [overseas investors] is the assessment and understanding of the corporate information in the onshore market – that’s where the information dissemination needs to be improved,” Ng Kheng Siang, Asia-Pacific head of fixed income at SSGA, said.
Each country may have different accounting standards and information disclosure requirements as well, which can further complicate foreign investors’ understanding of corporate data.
Citing the very fragmented nature of Asia's bond markets, CGIF’s Nishimura said the solution was greater standardisation and harmonisation of regulations, especially in Southeast Asia.
One area where investors would welcome standardisation is in credit ratings, especially given that there are a total of 14 rating agencies covering China, Indonesia, Japan, Korea, Malaysia, the Philippines and Thailand.
“Across the region, on corporate bonds, you have different rating agencies in different countries. How do you create a scale whereby you can equate an A [bond] with a BB [bond] in certain countries?” SSGA’s Ng said.
The danger of Asian bond markets staying fragmented and developing at different rates is that there is a risk that the faster-developing markets will come to dominate the Asian fixed income space, diminishing the diversity of credit investment opportunities in the region, Prudential’s Chua warned.
“You might end [up] with a case whereby five years from now … we’re essentially talking about two or three main issuing countries when we talk about Asia, and that would be a shame for the Asian fixed income market,” he said.