JPMorgan’s index plans show investors’ quandary on China
HONG KONG : Should global portfolios reflect China’s true economic weight, or be adjusted down for its opacity and riskiness? That question seems to be dividing global investors and forcing index curators such as JPMorgan to pander to both camps.
JPMorgan has so far only proposed an alternative index to its popular Asia credit index JACI, with a lower weighting for China.
But the new index should be popular as investors globally seek ways to minimise exposure to an economy whose arbitrary regulatory crackdowns, socialist policy leanings and growth priorities leave them uncomfortable.
A key concern has been China’s property sector, whose bonds comprise a big chunk of global high-yield debt and have been whipsawed by Beijing’s policies since 2020 aimed at reducing excesses and leverage.
Gary Ng, senior economist at Natixis Corporate and Investment Bank, points to the massive and rising defaults by real estate firms in the past year. That has changed the intent among global index providers from increasing China’s weight to decreasing it, he said.
“I think what has driven this reversal is the risk-averse behaviour. It is simply difficult for investors to assess these bonds, and no one knows exactly where the sector is heading,” he said.
Ng believes index providers are just trying to offer more options to investors who feel uncomfortable tracking certain types of assets.
Investors have shed holdings too. Offshore funds dedicated to Chinese bonds have seen consecutive monthly outflows since June 2022, to the tune of $911 million up to January, Refinitiv Lipper data showed.
JPMorgan hopes to cut China’s weighting to close to 30 per cent in the new index, named JACI Asia Pacific, compared with about 43 per cent in the JACI in which China is the largest component, a source told Reuters this week. The new index will raise the exposure of markets such as Japan, Australia, New Zealand and Papua New Guinea.
Fund managers had already been carving China out, and 2022 saw many of them launch emerging market or Asia products with no exposure to China, to meet increasing demand for such strategies from global investors wary of the rising risks in the world’s second-biggest economy.
Chinese equities comprise the largest portion of the MSCI Emerging Market stock index, making up a third.
KEEPING OPTIONS OPEN
China’s high yield bonds comprised half of JPMorgan’s Asia Credit High Yield index at their peak, bond investors said. But a string of delistings and a slump in prices has shrunk their weight to below 30 per cent.
More than 30 Chinese developers have defaulted on their offshore bonds in the past two years.
That makes diversification to other markets necessary, fund managers said.
“The trend of diversification will not change, and the weight of China property will not come back to the level it was before,” said Shih Yichun, portfolio manager of PineBridge Asia Pacific High Yield Bond Fund.
The fund’s top holding at the end of last year was an Australian company although China remains the largest exposure by region.
Natalie Trevithick, head of investment grade credit strategy at investment management firm Payden & Rygel in Los Angeles, said she was not surprised by JPMorgan’s proposal.
“Even ourselves, we manage a lot of separate accounts where we will have certain individuals asking about doing emerging market indices, the ex-China, so I think that’s a trend,” she said.
“China’s pretty bifurcated, because there are some very high quality issuers which trade at pretty tight levels. But then you have Chinese property developers, which can really skew it and add a lot of volatility and just uncertainty within the Chinese market and the ability for U.S. investors to trade it.”
Nevertheless, investors also point to the pitfalls of lowering or excluding China from indexes.
“If China is excluded, the benchmark and products will be less diversified,” said Chris Kushlis, chief of China and emerging markets macro strategy at T. Rowe Price.