Industry insiders laud China’s opening-up as bonds included in major index
FTSE Russell, one of the world’s three main bond index providers, announced last week that it will add Chinese government bonds to the FTSE World Government Bond Index (WGBI) from October 2021.
Industry insiders said the move shows international investors’ confidence in the long-term development of China’s economy and its continued expansion reform and opening-up in the financial sector.
“It reflects ongoing progress by China toward market reforms and increased access for global investors,” FTSE Russell said.
Since being added to the Watch List for WGBI inclusion in 2018, China has 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, according to FTSE Russell.
Waqas Samad, CEO of FTSE Russell, said: “The Chinese authorities have worked hard to enhance the infrastructure of their government bond market. Subject to affirmation in March 2021, international investors will be able to access the second largest bond market in the world through FTSE Russell’s flagship WGBI.”
FTSE Russell said in a report that an increased pace of market reform and internationalization of the renminbi has led to higher foreign ownership of Chinese government bonds, but this remains low by international standards.
CMC Markets, a Britain-based company that offers online trading in shares, spread betting, contracts for difference and foreign exchange across world markets, said the inclusion is likely to increase capital inflows into China sovereign bonds where China’s benchmark 10-year bond yield is at around 3.1 percent versus yields of close to zero for most developed nations’ bonds.
Even before FTSE Russell made the decision, market participants have indicated “high hopes” of an inclusion where Morgan Stanley had put the odds of inclusion at 90 percent, according to CMC Markets.
Tim Cheung and Riki Zhang, analysts from Informa Global Markets, wrote that major investment banks estimate that Chinese government bonds would receive a weighting of around 5.7 percent in the WGBI, and the inclusion would result in inflows of 142 billion U.S. dollars to the Chinese government bond market.
“Once included, China will become the second highest-yielding country in the WGBI, which should be very appealing to yield-seekers,” the two analysts wrote.
The country “has hit a key milestone in terms of access and tradability that’s going to attract a lot of investors,” Danny Suwanapruti, head of Asia emerging markets foreign exchange and rates strategy for Goldman Sachs, was quoted as saying by the Financial Times.
Before FTSE Russell, Chinese bonds had already been included in the Bloomberg Barclays Global Aggregate Index (BGAI) and J.P. Morgan’s Government Bond Index-Emerging Markets (GBI-EM).