China onshore bonds to be included in three of Citi’s global bond indexes

Citigroup is to fully include onshore Chinese bonds in its emerging markets and regional indexes, marking another significant milestone in Beijing’s efforts to woo foreign investors to its bond market, and to counter capital outflows.

Citi Fixed Income Indices said China bonds will be included in its three government bond indexes – the Emerging Markets Government Bond Index (EMGBI), Asian Government Bond Index (AGBI), and the Asia Pacific Government Bond Index (APGBI).

It will also set up two new indices, the EMGBI-Capped and AGBI-Capped, which limit individual market exposure by imposing maximum country weightings.

The Chinese bond market’s proportion in these indices will gradually increase to their full weighting over three months, but the timetable to kick off the inclusion and the exact weightings have not yet been revealed, according to a statement from the company.

Citi’s more widely used World Government Bond Index, however, still remains RMB-free.

“We are pleased to see regulatory changes that enable market access, allowing us to reflect and provide new investment opportunities in our indices,” said Arom Pathammavong, global head of Citi Fixed Income Indices.

The Citi announcement comes after Bloomberg Barclay said it has included China bonds in its global bond index offerings, and experts say this could prompt other index publishers to follow suit.

“This inclusion is a major move, given the popularity of Citi bond indices. Other global bond index vendors are likely to follow,” said Ken Hu, Invesco’s chief investment officer for Asia Pacific fixed income.

The People’s Bank of China announced in February last year plans to open the China interbank bond market for eligible foreign institutional investors to attract capital inflows.

Late last month, a significant hurdle to inclusion was removed, when the Chinese authorities opened onshore foreign-exchange derivatives to foreign fixed-income investors for hedging, Hu said.

“Inclusion is just pushing global institutions to where they should have been. Those indices offering parallel tracks are simply giving institutions the leeway to adjust in their own time to rebalance their portfolios to reflect global realities,” added Chantal Grinderslev, director of operations at Shanghai-based Z-Ben Advisors.

“Most global managers and institutions remain under-exposed to the yuan.”

It may take a few months for investors to adjust before adding China bond exposure, however, Hu said, but he is expecting more money inflows into the mainland, given the low or negative interest rates in Europe and Japan and a comparatively stronger yuan against Japanese yen and British pound.

Foreign holdings of Chinese bonds reached 870 billion yuan at the end of 2016, up 10.6 per cent year on year, but the share is still small compared with China’s more than 64 trillion yuan onshore bond market currently, according to data from The State Administration of Foreign Exchange and a recent UBS research report.

Hu added issuers of exchange traded funds are now likely to launch more onshore yuan bond ETFs.

Over the past two years there has been an acceleration in foreign Chinese bond buying, as China continues to seek its equity market’s inclusion in the MSCI Emerging Market Indexes. A-shares currently remain on the review list for inclusion into the index this year.

MSCI’s chairman and chief executive Henry Fernandez said in a Reuters interview in January that China’s crackdown on capital outflows was a new concern for investors.