China bond data reform may be preparation for Southbound Connect

China Central Depository and Clearing Co., Ltd (CCDC) adopted a new monthly bond-data disclosure format starting at the March release.

This analysis is by Bloomberg Intelligence FX & Rates Strategists Stephen Chiu and Jason Lee It appeared first on the Bloomberg Terminal.

One reason for this change could be to prepare for the debut of the China-Hong Kong Southbound Bond Connect in early 3Q.

Bond-data reform hints at Southbound debut in 3Q

CCDC, a state-owned financial institution that oversees the depository of about two-thirds of all China outstanding bonds, have stopped releasing the usual monthly bond-data excel-pack (in 24 excel files) from March onwards. Instead, it has published a more streamlined data-pack in the format of eight regular excel files plus "N" excel files (see exhibit). While "N" is set to two for now, we believe the number could rise to incorporate data related to onshore holdings of offshore bonds (facilitated by the Bond Connect Company Limited and Central Moneymarkets Unit in Hong Kong), once the China-Hong Kong Southbound Bond Connect is launched.

Southbound Bond Connect may be debuted as early as in July or August, as Hong Kong Monetary Authority's Chief Executive Eddie Yue said in an interview that this could happen in "early 2H".

Evolution in China Bond data on CCDC

 

China identifies holdings related to Bond Connect

CCDC now dedicates one excel (one of the two "N" excel spreadsheets) to cover data pertained to overseas investors. In particular, it offers breakdown of bond holdings and clearing via different investment channels. The first one is the China-Hong Kong Northbound Bond Connect, which started in July 2017, and now accounted for just over a quarter of total bond holdings (see exhibit). The second one is the non-Bond-Connect direct channels, including China Interbank Bond Market (CIBM) Direct, Qualified Foreign Institutional Investor (QFII) and Renminbi QFII (RQFII).

The other "N" excel spreadsheet, which is scheduled to be released later this month separately, will cover data related to China green bonds. This market may grow with China identifying green finance as one area of focus in the 14th five-year plan.

Overseas investors' China-Bond holdings (March)

 

Index-inclusion may lure $130 billion inflows

FTSE Russell confirmed the inclusion of China's treasury bonds (CGB) into its flagship World Government Bond Index (WGBI) in March, to be started in October and phased over 36 months. CGB will adopt a 5.25% weighting, and with roughly $2.5 trillion tracking the WGBI passively according to HSBC, that could imply over $130 billion inflows. The 36-month phase-in period may be longer than markets originally anticipated, but may be chosen to address settlement and liquidity concerns especially from Japanese investors -- one of the biggest user-group of WGBI.

In addition, the resulted passive and active inflows may not fully hedge the FX risks, hence also offering a structural appreciation driver for the yuan over the next three years

Overseas China-Bond holdings vs. Index inclusion

 

Global treasury holdings down again after 25 months

Overseas holdings of China treasury bonds fell 16.5 billion yuan, the first decline since the 17.4 billion yuan drop in February 2019. Part of the drop may be caused by the outright-repo transactions, with commercial banks being the counterparty to keep the bonds temporarily. In fact, commercial banks also added local-government bonds and policy-bank bonds in March. Note that from the March data release onwards, CCDC has added saving treasury bonds to the usual book-entry treasury bonds when reporting holdings by investors, and the addition of the former has resulted in a jump in holdings of the over-the-counter market.

We have created tables of bond types vs. bond holders by consolidating data from CCDC and the Shanghai Clearing House (SHCH), with renewed consolidation and categorization given CCDC's new data format.

Bond types vs. holders (March)

 

Outright repo may explain less global holdings

Apart from proactive selling of China's bonds by the overseas investors, another possible explanation for the 8.9 billion yuan drop in holdings in March may be due to the jump in outright-repo operations. Outright-repo trade clearing volume rose 1.4 times to 17.95 billion yuan, and may be due to overseas holders like central banks swapping their China-bond holdings for funds temporarily, given the possibility of urgent liquidity demand on the back of higher U.S. yields and dollar strength.

While both pledged-repo and outright-repo transactions involve exchanging bonds for borrowed funds for a period of time, only the latter causes a temporary change in the registered bond ownership.

China outright-repo clearing: Overseas investors

 

NCD holdings up while Yulan bond stalled

Negotiable certificates of deposit saw 416.9 billion yuan monthly jump in holdings in March, the largest in eight months, and was led by the 423.8 billion yuan demand from the unincorporated products. This is also consistent with the net issuance of NCD at 434.8 billion yuan, as contained NCD yield lured supply.

SHCH started reporting the total holdings of Yulan bonds in February (3.2 billion yuan), but there were no relevant transactions in March. This could be the reason why SHCH has limited urgency to list out the investor-holding breakdown for this bond category. Yulan bonds are denominated in dollars and euros and are issued through SHCH, but global investors settle this new asset class within Euroclear's network.

Bond types vs. holders (March)

 

Super short-term commercial papers in demand

March data suggested that bond holders might have become less worried by market delinquency events since 4Q20. For instance, holdings of corporate bonds like the super short-term commercial papers rose for the third straight month, with the 190.7 billion yuan rise the largest jump in 11 months. Unincorporated products, which include banks' wealth-management products and various private funds, added back super short-term commercial papers for the second consecutive month after cutting back holdings for nine straight months.

Bond types vs. holders (March)

 

Commercial-bank bonds led total holdings surge

Holdings of Chinese commercial-bank bonds rose 1.36 trillion yuan in March, the largest rise among all bond types, driven by the unincorporated products. This investor group also added holdings of negotiable certificates of deposit, and the addition of commercial-bank bonds might be offset by the offloading of the debt securities that are not identified separately by holders.

Bond types vs. holders (March)

 

New data format may help general public, not analysts

CCDC's more streamlined data-release format may help both onshore and offshore general audience to better grasp the overall picture of China's bond market, CCDC also claimed the intention was to simplify the previous more "complicated" and "professional" version, this could complicate bond analysts' job, given the lost of granular data input for their research.

Monthly bond-holding data may explain investor preferences for different types of bond in China. In general, holdings are concentrated in government bonds, policy-bank bonds and NCDs, with commercial banks or unincorporated products serving as the main holders. Meanwhile, insurance companies tend to focus on longer-tenor bonds to match their liabilities. Overseas investors remain minor players in the market, but their influence may grow as China opens up.

Bond types vs. holders (March)

 

Leverage-ratio breakdown no longer feasible

CCDC has stopped reporting data on the outstanding balance of pledged-repo and outright-repo transactions for various bond holders -- which are vital inputs for the calculations of their respective leverage ratios. Otherwise, as a recap using the last-available data, securities companies tend to hold bonds with more speculative purposes, and they leveraged up again as the liquidity situation improved in February. This group of bond holders added 14.9 percentage point of leverage vs. the 38.3 percentage point drop in January. That said, the other financial institutions investor group, which includes the trust companies and automobile financial companies, leveraged up the most among all investor groups, by 28 percentage points in February.

Bond leverage ratio by investors (February)

 

Bond holdings by maturity data unavailable now

CCDC's new data release practice has stopped disclosing data on bond holdings by maturity from March onwards, with the latest breakdown only to be seen from February data. China government bonds with maturity of one-to-three years are still the most popular for investors. Commercial banks, which are the major holders of these bonds, tend to stay in shorter duration and hold the bonds till maturity due to their more conservative investment approach. While the notional amount of the holdings in maturities beyond 10 years remain low, this group has the potential to rise once China further opens up its bond market. Overseas insurance companies and central banks may step-up their interests in the long-tenor China government bonds eventually, with the yuan's growing status as a reserve currency also being a supportive factor.

Holdings by bond type, maturity (February)