ICE Data Indices has announced that Chinese RMB-denominated government debt will be added to its emerging market sovereign bond indices starting in September and phased in over a ten-month period.
ICE will begin phasing in Chinese government debt into its emerging market sovereign bond indices from next month.
The move follows in the footsteps of rival index provider Bloomberg which is in the final stages of admitting RMB bonds into its Bloomberg Barclays Global Aggregate Index, the preeminent barometer of the global fixed income market.
ICE’s decision to include China comes after the firm’s annual index rule review which is conducted through a public survey on proposed amendments with feedback evaluated by a governance committee.
The committee said that, while views on China continue to be mixed, a strong majority of investors now see Chinese domestic debt as meeting basic access and liquidity requirements for index inclusion.
It noted, however, that the process of foreign access remains slow and cumbersome, and friction costs of transactions can still be high.
The annual index rule review also proposed the inclusion of sovereign bonds from Bangladesh, Costa Rica, India, Morocco, Sri Lanka, Taiwan, and Uruguay. The committee rejected these countries’ inclusion, however, on the basis that a majority of respondents believe these markets remain too illiquid or inaccessible to foreign investors.
Benchmark ramifications
The indices affected by the rule change include the ICE BofA Diversified Emerging Markets Sovereign Bond Index and the ICE BofA Local Debt Markets Plus Index.
Chinese government bond exposure will be phased into both indices in 1% increments over a ten-month period beginning on 30 September 2020. Each index caps any country exposure at 10%.
The ICE BofA Diversified Emerging Markets Sovereign Bond Index consists of emerging market sovereign debt with at least $10bn face value outstanding. Following the completion of the inclusion process, based on current market debt values, the index’s largest country exposures will be China (10.0%), South Korea (9.0%), Malaysia (8.0%), Indonesia (7.9%), and Brazil (7.5%).
The ICE BofA Local Debt Markets Plus Index similarly consists of emerging market sovereign debt with at least $10bn face value outstanding but only includes issuers with foreign currency credit ratings of A1 or lower. Following the inclusion process, based on current market debt values, the index’s largest country exposures will be China (10.0%), Malaysia (10.0%), Indonesia (9.6%), Thailand (9.3%), and Brazil (9.0%).