Chinese sovereign bonds to gain entry into FTSE global index
Beijing reforms open doors for more international investors to access world's second largest debt market
25 Sep 2020 | The Asset

Chinese government bonds will be included in the FTSE World Government Bond Index (WGBI) from October 2021, allowing more international investors to access the world’s second largest bond market with US$16 trillion outstanding, according to global index provider FTSE Russell. The decision is subject to final affirmation in March 2021.

Since being added to the FTSE watch list for WGBI inclusion in 2018, Chinese authorities have implemented significant improvements to the fixed-income market infrastructure to expand access to international investors, including improving secondary market bond liquidity, enhancing the foreign exchange market structure, and developing global settlement and custody processes, FTSE Russel said in a statement. Additional reforms are imminent, including the facility for international investors to register at legal-entity level when opening accounts.

Pan Gongsheng, deputy governor of the People’s Bank of China and director of the State Administration of Foreign Exchange, welcomed the move, pledging that the Chinese central bank will continue to work closely with industry participants to further enhance relevant regulations and provide “a more friendly, convenient investment environment” for investors.

Says Pan: “The Chinese bond market is an important component of the Chinese financial market. The market has continued to expand in depth and breadth and international investments in the market have grown by 40% per annum over the last three years: as at the end of August 2020, international investors held 2.8 trillion yuan (US$351.48 billion) of Chinese bonds. This fully reflects the confidence international investors have in the healthy long-term development of [China’s] economy, as well as its commitment to further opening up its financial markets.”

Chris Woods, head of policy and governance at FTSE Russell, praised China for its recent market reforms that have led to the new country classification, including enhancements to bond market liquidity, allowing additional choice of counterparties for FX trading, and implementing improvements to post-trade settlement and custody practices. “We will continue to work closely and constructively with the People’s Bank of China over the coming months to ensure the recently implemented reforms yield tangible improvements to market structure,” he adds.

Also welcoming the development, HSBC Global Research estimates the WGBI inclusion could translate to US$150 billion of new inflows into the market, or US$320 billion as a combined result of inclusion in indices including the Bloomberg-Barclays Global Aggregate Index (BBGA) and the JP Morgan Government Bond Index-Emerging Markets (GBI-EM).

Says Patrick Wong, head of China business development and client management, securities services, at HSBC: “Data shows net foreign holdings of Chinese bonds have grown every month for almost two years. With its international connectivity and local expertise, HSBC has delivered investors the benefits of initiatives from CIBM Direct to Bond Connect and RQFII schemes. As the PBOC continues to simplify access to the CIBM and exchange traded bond market, from registration, to trading and settlement, we look forward to further supporting our clients’ participation in this exciting market.”

The decision is also welcomed by J.P. Morgan Asset Management, which notes that international investors have been attracted by the China bond market’s compelling yield levels, at 2.5% to 3.5% range, relative to other developed market government bond markets priced at zero or negative yields. With the latest inclusion, collectively the index inclusions translate to significant passive inflows as tracker funds and ETFs move in lock step with these indices, sending approximately US$250 billion to US$ 300 billion into China’s onshore bond market, JPMAM estimates.

“Backed by supportive trends, Chinese government bonds’ foreigner ownership percentage ratios have gone from a modest 2% in previous years to a touch over 9%. Although it is still relatively modest compared to foreign holdings in other Asia markets (15% to 30%), it is increasingly clear that China bonds’ globalization is simply a matter of time, further accelerated by increasingly accessible hedging options that enable investors to manage risk,” says JPMAM portfolio manager Jason Pang.

Meanwhile, FTSE Russell has also announced that Malaysia will continue to be included in WGBI but will remain on its fixed-income watch list for a potential downgrade.

Nigeria, Saudi Arabia and Vietnam are added to the list of standalone indices. FTSE Russell says it will consult with market participants and index users on the accessibility conditions for foreign investors in these markets and will consider their inclusion on the watch list for inclusion in the FTSE Emerging Market Government Bond Index (EMGBI).

On equities, Vietnam will remain on the watch list for reclassification to Secondary Emerging, Russia will be added to the watch list for reclassification to Advanced Emerging, and Argentina will move from Frontier to Unclassified.

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