Chinese bonds draw foreign investors on upcoming global index inclusion
Chinese onshore bonds are becoming a larger part of global investors’ portfolios, suggesting their gradual acceptance as mainstream fixed income investment ahead of their anticipated official inclusion into one of the most followed international benchmark bond indexes.
Foreign investors’ participation in yuan-denominated Chinese onshore bonds rose to 1.09 trillion yuan (US$172.9 billion) in March, up from 1.07 trillion yuan in February and from 761.6 billion yuan in March 2017, according to data from China Central Depository & Clearing. The increase in foreigners’ holdings however is from a low base – foreign ownership remains only about 2 per cent of China’s US$12 trillion bond market.
The country’s debt had been excluded from major global bond indices because of China’s restrictions on market access, capital controls and other operational issues.
Bloomberg’s announcement last month that it would conditionally add Chinese yuan-denominated government and policy bank securities to its global bond benchmark indices starting April 2019 was a major stamp of approval of the nation’s liberalisation efforts, analysts said.
“The inclusion is a validation that Chinese bonds are investible and investment-worthy,” said Teresa Kong, portfolio manager at Matthews Asia. “It provides positive re-enforcement for the steps toward liberalisation that the government has undertaken.”
Investment grade Chinese bonds will be gradually phased into the Bloomberg-Barclays flagship Global Aggregate Index, with 386 securities expected to be added by 2020. They will represent 5.49 per cent of the US$53.73 trillion index, the fourth largest currency component after the US dollar, euro and Japanese yen.
Analysts estimate the inclusion will bring an additional US$100 billion to US$300 billion in foreign investor demand over the next three years because passive exchange traded funds by nature will be forced to invest in line with the allocation of the Global Aggregate Index.