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FTSE Russell will add Chinese sovereign bonds to global bond benchmarks from October 2021, potentially drawing more fund inflows into its US$16 trillion debt market. Photo: Reuters

China set to lure billions of dollars in funds as sovereign debt enters FTSE index amid decoupling concerns

  • Chinese state debt to be included in FTSE World Government Bond Index in October 2021
  • Inclusion could bring new inflows of up to US$150 billion to Chinese bond market, HSBC says

Chinese government debt will be included in yet another benchmark bond index, potentially drawing more money from global fund managers amid heightened concerns about economic decoupling with the US in recent months.

FTSE Russell will start adding the sovereign debt into its World Government Bond Index from October next year, the latest milestone in the opening of the country’s US$16 trillion bond market to foreign capital. JPMorgan Chase and Bloomberg Barclays previously unveiled programmes to phase in the yuan-denominated notes into their indices beginning last year.

The latest move suggests global appetite for Chinese assets has not been diminished by more than two years of trade war between the world’s two biggest economies and efforts to restrict Chinese companies from accessing the US capital market for funding. The rising tensions have also widened into other spheres, including allegations of espionage and disputes over the origins of coronavirus pandemic and the national security law in Hong Kong.

“The Chinese authorities have worked hard to enhance the infrastructure of their government bond market,” said Waqas Samad, FTSE Russell’s chief executive and director of information services for the London Stock Exchange Group, in a statement. “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 is owned by the London Stock Exchange Group. Thursday’s decision came after the index provider declined to emulate its major competitors in adding Chinese debt to its suite in a September 2019 review, without citing a reason. Market size, credit quality and currency convertibility are among typical inclusion criteria.

Morgan Stanley previously said the inclusion of Chinese state debt in the FTSE Russell index could attract inflows of as much as US$90 billion next year, while HSBC said on Friday that new inflows into Chinese debt could top US$150 billion as a result.

Foreign investors held 2.8 trillion yuan (US$410 billion) of Chinese bonds at the end of August, with the Chinese bond market expanding by 40 per cent annually over the past three years, according to Pan Gongsheng, deputy governor of the People’s Bank of China and director of State Administration of Foreign Exchange. China is the world’s second biggest bond market after Japan.

“This fully reflects the confidence international investors have in the healthy long-term development of its economy, as well as its commitment to further opening up its financial markets,” Pan said. “PBOC will continue to work closely with industry participants to further enhance relevant regulations and to provide a more friendly, convenient investment environment for investors domestically and aboard.”

While China has made it easier for foreign investors to own its yuan-based securities, including a Bond Connect with Hong Kong established in July 2017, investors have flagged risks tied to limited hedging options because of a lack of depth and liquidity in trading.

Besides, China’s US$4.1 trillion corporate bond market is also facing some pressure from record-high default this year as the nation’s economic recovery remains fragile. Some 3.65 trillion yuan of notes mature by year-end, according to a Bloomberg report in August.
FTSE Russell is the last of the major bond index providers to include Chinese government debt in its indices. In June, it completed the first phase of its inclusion of Chinese A-shares in its global equity benchmarks.
In April of last year, Bloomberg began phasing in yuan-denominated government bonds and policy bank securities into its US$54 trillion Bloomberg Barclays Global Aggregate Index over a 20-month period, while JPMorgan Chase began adding Chinese government debt to its indices at the end of February.

Greater appetite for Chinese debt comes as Beijing has moved in recent years to further open up its financial markets to overseas investors, including through the Bond Connect, which allows qualified foreign investors to buy Chinese bonds without setting up an onshore business.

This year, Beijing allowed foreign companies to take full control of their onshore joint ventures in the securities, insurance and asset management sectors, spurring an array of deals by the likes of Credit Suisse, Goldman Sachs and JPMorgan.

It also comes at a time of worsening relations between Washington and Beijing, with the Trump administration threatening to delist Chinese companies from US bourses and urging American college and university endowments to sell their holdings of Chinese stocks, including companies in emerging market index funds.

The inclusion by FTSE Russell is a recognition of China’s progress in improving market accessibility for foreign investors, including extending trading hours and improving liquidity in secondary markets, according to Candy Ho, HSBC’s global head of RMB business development in its global markets unit.

“Overseas investors have been purchasing more China bonds this year with a decent return amid the global zero-rate environment, ongoing global reserve diversification and inflows as a result of the two prior bond index inclusion,” Ho said. “The FTSE WGBI index inclusion will further accelerate global investors’ participation.”

Since Bloomberg’s inclusion of Chinese government bond last year, China has recorded US$130 billion of debt inflows, with 45 per cent of those inflows coming in the past three months, according to UBS strategists Rohit Arora and Mary Xia.

Foreign investors are attracted to China’s bond market, in part, because yields range between 2.5 per cent and 3.5 per cent, as compared with zero or negative yields for government bonds in developed markets, said Jason Pang, a portfolio manager at JPMorgan Asset Management.

“Chinese government bonds’ foreigner ownership percentage ratios have gone from a modest 2 per cent in previous years to a touch over 9 per cent,” Pang said. “Although it is still relatively modest compared to foreign holdings in other Asia markets (15-30 per cent), it is 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.”

This article appeared in the South China Morning Post print edition as: FTSE Russell to add Chinese Debt to index
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