A Chinese national flag appears in front of the Oriental Pearl Tower in Shanghai on September 8, 2019.
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SINGAPORE – FTSE Russell, the main index provider, said on Thursday that it would add Chinese government bonds to its flagship World Government Bond Index from October next year – a development that would bring billions of dollars to China.
The inclusion – which will be China’s third entry into the major global bond index – comes at a time when investors are looking for yields in an environment of ultra-low interest rates. Some investors estimated that at least 100 100 billion would flow into China after the FTSE entered the bonds on the Russell Index.
“I think this is another important milestone in the internationalization of China’s … their domestic financial markets,” Ben Powell, chief investment strategist for Asia Pacific at the BlackRock Investment Institute, told CNBC’s “Street Signs Asia” on Friday.
He noted that 10-year Chinese government bonds yield about 3%, which is “a very large number in the global context.”
Increase in foreign participation
China’s market of approximately bond 16 trillion is the second largest in the world, but is owned by international investors.
International investors held 2.8 trillion yuan (4 10,410.69 billion) in Chinese bonds by the end of August, said Na Gongsheng, deputy governor of the People’s Bank of China and director of the State Administration of Foreign Exchange, in a statement. That’s less than 3% of the entire Chinese bond market.
To increase the reach of international investors, Chinese officials have implemented significant improvements in the infrastructure of the fixed income market.
According to Hong Kong-based CSOP Asset Management, joining the FTSE World Government Bond Index could increase the participation of foreign investors in the Chinese bond market, which will also boost the yuan. The company said it would be the fourth largest currency in the index after the Chinese yuan, US dollar, euro and Japanese yen.
FTSE Russell said it would confirm its exact date in March when Chinese government bonds would enter its index. Prior to the FTSE, Chinese government bonds were added to the Bloomberg Barclays Global Aggregate Index and the JPMorgan Government Bond Index-Emerging Markets.
“Chinese authorities have implemented significant improvements in the infrastructure of the fixed income market to increase the reach of international investors,” FTSE Russell said in a statement announcing its decision on China.
That reform includes increasing liquidity in the bond market, allowing additional selection of counterparts in foreign exchange trading, and better post-trade settlement processes, the company added.
– CNBC’s Eustans Huang contributed to this report.
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