FTSE Russell will add Chinese government bonds to its flagship World Government Bond Index (WGBI), the index provider said on Thursday, paving the way for billions of dollars of inflows into the world’s second-largest economy.
The Chinese government bonds will be included on the index from October 2021, pending confirmation in March 2021. The addition will be phased into the index over a period of 12 months.
“Since being placed on the watch list, the Chinese authorities have implemented significant improvements to the fixed income market infrastructure, facilitating easier participation by international investors,” FTSE Russell said in a statement.
The index includes mostly developed economies and is a major step for Chinese bonds as investors seek safe-haven assets in a zero-interest-rate world.
“Because the Chinese domestic monetary policy is not that closely linked with global monetary policy, you do get diversification benefits allocating to [yuan] bonds,” said Binay Chandgothia, managing director and portfolio manager at Principal Global Investors in Hong Kong.
Chinese government bonds are already a part of the JPMorgan and Bloomberg Barclays index suites, but the FTSE WGBI has a far larger passive band of investors following it.
Goldman Sachs estimates there is US$2.5 trillion of global cash following the WGBI, and China’s inclusion could drive some US$140 billion into mainland bonds over the inclusion period.
China is a US$16 trillion bond market, with around US$1.5 trillion eligible for inclusion in the index according to FTSE Russell.
Pan Gongsheng, deputy governor at the People’s Bank of China (PBOC), said international investors held 2.8 trillion yuan (US$410 billion) worth of Chinese bonds at the end of August.
“The Chinese bond market is an important component of the Chinese financial market. The market has continued to expand in depth and breadth and international investments in the market have grown by 40 per cent per annum over the last three years,” said Pan.
“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.
“Today, FTSE Russell has announced an inclusion timetable for Chinese government bonds in its flagship WGBI index. This is very much welcomed by the PBOC. 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.”
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