Index provider FTSE Russell will include China in its FTSE World Government Bond Index in October 2021, a move that could help draw as much as US$300 billion into the world’s second largest debt market.
“The inclusion reflects ongoing progress by China toward market reforms and increase access for global investors,” FTSE Russell says in a statement on September 25.
China’s bond market is estimated to have around $16 trillion of total assets, less than half the size of the US market, the world’s largest. The US bond market has over $40 trillion of assets, according to US investment consultancy Zacks Investment Research.
International investors have been deploying capital into Chinese bonds since China was included in two other key indexes, according to Jason Pang, a portfolio manager at J. P. Morgan Asset Management.
J.P. Morgan Asset Management and Bloomberg L.P. added Chinese government debt into their emerging-market bond benchmarks last year.
China’s inclusion into all three indexes translates into significant passive inflows because tracker funds and exchange-traded funds move in lockstep with these benchmarks, potentially “sending approximately $250 billion to $300 billion into China’s onshore bond market”, Mr. Pang tells Asia Asset Management (AAM).
He says foreign ownership of Chinese government bonds has grown to just over 9% now from only 2% previously.
Although the share is still relatively modest compared to other Asian bond markets where foreign ownership range from 15% to 30%, “it’s increasingly clear that China bonds’ globalisation is simply a matter of time, further accelerated by increasingly accessible hedging options that enable investors to manage risk”, Mr. Pang adds.
China is one of the largest bond markets in the world with a A1/A+ investment grade sovereign rating, says Jim Veneau, head of fixed income Asia at AXA Investment Managers.
“As China further opens up its capital account to foreign investors, the market will likely be considered as developed market rather than emerging market in the longer term and will be important for investors’ strategic allocation,” Mr. Veneau tells AAM.
FTSE Russell’s move is a reminder for global investors to reassess the characteristics of onshore China bonds and the potential role they can play in a diversified investment portfolio, according to Cecilia Chan, chief investment officer of Asia Pacific fixed income at HSBC Global Asset Management.
“The decision by FTSE Russell is a further recognition of China’s efforts to advance its financial market reforms and provides irrefutable evidence of the mainstreaming of China onshore bonds,” she says in a report on September 25.
Beijing began to open up the onshore bond market in 2017 with the introduction of the Bond Connect channel that allows investors in Hong Kong and China to invest each other’s debt markets.
