JPMorgan proposes new Asia credit index with lower China weighting

HONG KONG: JPMorgan is proposing a new Asia credit index with slashed China weighting in parallel to its existing $85 billion Asia credit index, two sources told Reuters, amid growing geopolitical tensions and dimming appetite for Chinese property bonds.

For the new index, JPMorgan has suggested the weighting of China be cut to close to 30 percent compared with a level of about 43 percent in its existing JPMorgan Asia credit index (JACI) in which China is the largest component, according to one person with direct knowledge of the matter.

The proposal comes at a time of heightened tensions between Washington and Beijing over issues from the Russia-Ukraine war and suspected Chinese spy balloons to tit-for-tat trade friction and technology rivalry - tensions that have unsettled investors.

Many large global money managers are steering clear of Chinese assets, missing out on the nation's post-Covid stock market rally in the latest example of strategic concerns trumping juicy returns.

The move comes after JPMorgan initially proposed expanding the existing JACI, but with China weighting cut to 29.86 percent from 43.14 percent now, according to a proposal shared with investors in January and reviewed by Reuters, and the second source and two other people.

If the originally proposed reshuffle to the existing index had gone through, the Asia credit market would have been impacted with passive and active fund managers dumping China debt to stay aligned with the weighting change, the first source said.

JPMorgan describes the new index, named JACI Asia Pacific, as an "enhanced" version of JACI with added exposure to more Asia-Pacific markets such as Japan, Australia, New Zealand and Papua New Guinea, the source said. JACI is a premier Asia credit index, tracked by fund managers controlling more than $85 billion worth of assets, according to the January proposal.

Chinese issuers' debt will remain the largest chunk of the new index, followed by Japan at 20 percent and Australia at around 10 percent, according to the source.

JPMorgan declined to comment for this article.

The proposal to reduce China weighting came after some fund managers pushed JPMorgan to cut JACI's China debt exposure, two sources said, as its poor performance dragged down popularity of the passive products that track the index.

Global investors are increasingly asking for emerging market or Asia products with no exposure to China, having taken a hit from regulatory crackdowns and a property sector liquidity crisis, to avoid geopolitical risks.

In the January proposal for JACI, the rebalanced index sought to reduce "single country risk" and to "capture the entire Asia-Pacific region debt segment" and provide "better risk-adjusted returns with lower volatility", according to a document reviewed by Reuters.

Dollar bonds issued by Chinese corporates, mainly property developers, account for a lion's share in Asia or emerging markets' debt indices. However, Chinese developers' cash crunch have hit both active and passive index investors.

Jane Cai, a fixed income portfolio manager at China Asset Management (Hong Kong), said at a media briefing this month that JPMorgan was also internally discussing an ex-China Asia credit index. She said the move was in response to some overseas investors' requests that a non-China index be compiled.