HONG KONG, Feb. 27 (Reuters) – JPMorgan (JPM.N) is proposing a new Asia credit index with a reduced China weighting in parallel with its existing $85 billion Asia credit index, two sources said, amid growing geopolitical tensions and declining appetite for Chinese property bonds.
For the new index, JPMorgan has proposed reducing the weighting of China to nearly 30% from a level of about 43% in its existing JPMorgan Asia credit index (.JPMACI) (JACI) in which China is the largest component, according to one person with direct knowledge of the case.
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 combat trade friction and technological rivalry – tensions that have upset investors.
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The move comes after JPMorgan initially proposed expanding the existing JACI, but reduced its weighting to China from 43.14% now to 29.86%, according to a proposal shared with investors in January and reviewed by Reuters, and the second source and two other people.
Had the originally proposed realignment to the existing index gone ahead, the Asian credit market would have been impacted by passive and active fund managers dumping Chinese debt to stay in line with the weight change, the first source said.
JPMorgan describes the new index, called JACI Asia Pacific, as an “enhanced” version of JACI with additional exposure to more Asia-Pacific markets such as Japan, Australia, New Zealand and Papua New Guinea, the source said. JACI is a leading credit index in Asia, tracked by fund managers managing more than $85 billion in assets, according to the January proposal.
According to the source, debt from Chinese issuers remains the largest share of the new index, followed by Japan at 20% and Australia at around 10%.
The sources declined to be named as they were not authorized to speak to the media.
JPMorgan declined to comment on this article.
The proposal to reduce the weighting for China came after some fund managers urged JPMorgan to reduce JACI’s exposure to Chinese debt, two sources said, as the poor performance dragged down the popularity of the passive products tracking the index.
Global investors are increasingly asking for products from emerging markets or Asia without exposure to China, after taking the blow of regulatory action and a liquidity crisis in the real estate sector, to avoid geopolitical risks.
In the January proposal for JACI, the rebalanced index sought to reduce “single country risk” and “capture the entire debt segment of the Asia-Pacific region” and provide “better risk-adjusted returns with lower volatility,” according to a document that has been reviewed by Reuters.
Dollar bonds issued by Chinese companies, mainly property developers, account for the lion’s share of Asian or emerging market debt indices. However, the Chinese developer cash crunch has affected both active and passive index investors.
Jane Cai, a fixed income portfolio manager at China Asset Management (Hong Kong), said at a press briefing this month that JPMorgan was also internally discussing an ex-China Asia credit index. She said the move was in response to requests from some foreign investors to compile a non-Chinese index.
Reporting by Xie Yu and Selena Li; Additional reporting Summer Zhen; Edited by Sumeet Chatterjee and Kenneth Maxwell
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