China’s vast $16 trillion bond market will become more accessible to foreign investors, including Americans, next year.
FTSE Russell, an index compiler and provider owned by the London Stock Exchange, said on Thursday that it will add Chinese government bonds to its flagship FTSE World Government Bond Index (WGBI) in October 2021.
As a result, investors in numerous bond funds and fixed income exchange traded funds will automatically gain exposure to the Chinese bond market, the second largest such market in the world after the U.S.
The inclusion is expected to generate billions of dollars of inflow into Chinese bonds, primarily from the U.S., Europe, and Japan.
FTSE Russell will become the last of the three principal global bond index compilers – after Bloomberg Barclays and JPMorgan Chase & Co. – to add Chinese sovereign debt.
Last year, FTSE Russell had rejected Chinese debt, citing a lack of secondary market liquidity, among other concerns.
But now FTSE Russell said the inclusion of Chinese bonds reflects “ongoing progress by China toward market reforms and increased access for global investors.”
Chinese authorities, the index firm added, have implemented “significant improvements” to its fixed income market infrastructure, including upgrades to its secondary market bond liquidity.
“The Chinese authorities have worked hard to enhance the infrastructure of their government bond market,” said Waqas Samad, CEO of FTSE Russell and group director of information services at London Stock Exchange. “Subject to affirmation [by FTSE]in March 2021, international investors will be able to access the second largest bond market in the world through FTSE Russell’s flagship WGBI.”
Pan Gongsheng, deputy governor of the People’s Bank of China (China’s central bank) and director of state administration of foreign exchange, said international investments in China’s bond market have grown by 40% annually over the past three years. As of the end of August 2020, foreign investors held about $410 billion of Chinese bonds – although that amounts to less than 3% ownership.
“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,” Gongsheng added.
Xing Zhaopeng, an economist at Australia & New Zealand Banking Group Ltd., told Bloomberg that the inclusion represents a “new milestone.”
“It is a new catalyst as well given the huge potential for foreign capital inflows considering FTSE’s weight and influence,” he said. “Foreign ownership of Chinese assets will increase significantly — I’d say it would at least double.”
High-yielding Chinese sovereign bonds are particularly attractive to investors since near-zero interest rates in Europe and the U.S. provide their notes with very little return. The 10-year Chinese government bonds are currently yielding about 3%. (In contrast, the 10-Year U.S. Treasury has a yield of about 0.67%).
Goldman Sachs analysts led by Danny Suwanapruti wrote in a Friday note that inclusion in the FTSE Russell will also change the perception of China as a developed market instead of an emerging one.
“I think this is another important landmark in China’s … internationalization of their domestic financial markets,” Ben Powell, BlackRock Investment Institute’s chief investment strategist for Asia Pacific, told CNBC.