A Look at the Inner Workings of Bloomberg’s China Credit Tracker

(Bloomberg) -- China’s credit market stands out even in a world increasingly awash in debt. It’s grown exponentially in recent decades, fueling one of the fastest economic expansions in history. The risks have multiplied too, as more borrowers stumble with ever more global lenders exposed.

Bloomberg’s China Credit Tracker uses proprietary and public sources to shed new light on stress in the riskiest corners of the country’s credit markets. It synthesizes monthly data to show how strains rise and fall over time. 

Given the dramatic growth in the sheer volume of Chinese corporate bonds, there can at times be less data available than in more mature credit markets. It can be hard for an investor to get an accurate read on a company’s financial health; pricing may not reflect a robust assessment of risk.

We focused on what we think are the four most revealing, reliable metrics in the onshore market and in the offshore market.

What do the stress gauges measure?

The dials indicate how the credit market is responding to the events of the past month. A market with low stress (in the blue ranges) is likely to be more resilient to micro events, like a high-profile default, and more sweeping measures like central bank actions. In a market with high stress (in the orange ranges), the same actions would trigger more dramatic swings.

Our measurement of “stress” is a combination of factors:

• In the onshore (yuan) market, we look at total defaults and at the spread between local AA rated bonds and their respective government notes.
• In the offshore (dollar) market, we look at absolute yields on junk bonds as one measure of investor sentiment and the monthly returns for all China dollar bonds as an indicator of overall market health.

How are these measures helpful?

The world of  Chinese credit is still relatively opaque. There aren’t many standardized indicators that investors can use to quickly assess broader stress levels. For onshore and offshore, we wanted to combine market performance with market sentiment to capture both what is happening and how investors are reacting to it.

Particularly in the onshore market, defaults are a newer phenomenon and aren’t always reflected in publicly available data. Adding information gathered and verified by Bloomberg News gives a fuller picture of how much debt is in default. The premiums for lower-rated bonds reflect investor appetite for riskier forms of debt.

Offshore, monthly returns reflect market performance overall. Absolute yields on junk bonds are one indicator of investors’ eagerness for risk.

All these metrics are awarded a score from 1 (dark blue) to 6 (dark orange), based on a statistical average over the previous months. Onshore defaults are measured against the rolling 12-month z-score; the rest are pegged to the rolling 24-month z-score. This helps account for normal variation.

What does the heat map show?

The heat map shows the stress gauge inputs by month over the past 12 months. It reveals how each individual component has changed over time.

Where does the data come from?

• Onshore bond spreads: ChinaBond Corporate Bond Yield Curve (AA) Three-Year (CNCBR3); ChinaBond Government Bond Yield Curve Three-Year ( CNTBI3).
• Onshore defaults: Monthly totals based on public filings and information gathered by Bloomberg News. A bond is considered in default if it has failed to meet the repayment condition stated on those documents or in its prospectus. A bond is not considered in default if bondholders have consented to a grace period. Totals are updated monthly and may incorporate new information for previous periods.
• Offshore high-yield bond yields: Bloomberg Barclays Asia Ex-Japan US Dollar Credit China HY ( I29381US)
• Dollar bond total returns: Monthly returns from the Bloomberg Barclays Emerging Markets US Dollar Aggregate: China Total Return Index ( I29136US)

How often is the data refreshed?

The data is refreshed monthly, or more frequently as news events merit.

Who vetted these methods?

The gauges were developed by Bloomberg News reporters in consultation with Bloomberg Intelligence analysts and external experts, including academics and finance professionals.

©2021 Bloomberg L.P.