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.
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.
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.
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.
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.”