China’s bonds snubbed by FTSE Russell’s flagship index, missing out on up to US$7.5 billion of extra investments a month
- FTSE Russell opted not to follow two competitors in adding China’s domestic debt to its flagship Government Bond Index
- The decision means China could be missing out on US$6 billion to US$7.5 billion of extra investment flows a month, according to a Goldman Sachs estimate
China failed to win inclusion into one of the world’s benchmark bond indexes, as FTSE Russell opted not to follow two competitors in adding the country’s domestic debt.
China will remain on the FTSE Russell’s watch list, according to a statement Thursday that showed the firm demurred on including it in its flagship World Government Bond Index.
The decision means China could be missing out on US$6 billion to US$7.5 billion of extra investment inflows a month, according to a previous estimate by Goldman Sachs Inc. While still marginal players in the world’s second-biggest bond market, foreign investors have steadily boosted their holdings to record levels as China increased access and won inclusion in April to the Bloomberg Barclays Global Aggregate bond index.
FTSE Russell didn’t cite specific reasons for leaving China off for now. It said China will remain on watch for potential upgrade of its accessibility rating, “based on feedback from index users that the Chinese government bond market continues to make demonstrable progress toward meeting the criteria for the highest accessibility level.”
The company said that further updates will come “as appropriate after the interim review in March 2020.”
There was no immediate reaction in China’s yuan in offshore trading. It was steady at 7.1254 per dollar as of 7:45am in Tokyo.
While China has made it easier to buy its domestic securities, including through a Bond Connect with Hong Kong, some global fund managers have cited continuing concerns about limited hedging options. Chinese bonds, including its government securities, are also much less liquid than those of other markets – the banks that dominate the market tend to buy and hold the notes.
Even so, JPMorgan Chase & Co. earlier this month decided it will start a phased inclusion of Chinese sovereign debt into its emerging-market indexes from the end of February. Bloomberg Barclays also opted for a phased process. Bloomberg LP owns Bloomberg Barclays and Bloomberg News.
Read here about JPMorgan’s decision earlier this month.
FTSE Russell also said that Malaysia remains on its watch list for exclusion from the WGBI, stopping short of that move this time. Malaysia has announced a slew of measures to deepen its onshore markets. Analysts had estimated outflows could reach at least US$5 billion if the nation was dropped.
Israel won inclusion to the WGBI, starting in April. There was a “strong consensus” among index users that the country “meets the thresholds of our highest accessibility level,” FTSE Russell said.
Chinese authorities earlier this month scrapped foreign investment limits in bonds and stocks, the latest step to open up the world’s second-largest bond market to overseas money.
Bloomberg Intelligence strategists Timothy Wee Lee Tan and Jason Lee estimated that inclusion into the WGBI and JPMorgan’s indexes could drive US$130 billion into China’s bond market. Overseas investors owned 2 trillion yuan (about US$280 billion) of onshore Chinese bonds – just over 2 per cent of the amount outstanding but still the highest level yet – as of August, according to data from ChinaBond and the Shanghai Clearing House.
FTSE said in April it was considering upgrading China to its minimum rating for the market to be part of the WGBI. The rankings are part of a framework started in January “to bring greater transparency to managing country inclusion” for the firm’s fixed-income indexes.
