Investors take an interest in Chinese government bonds as possible inclusion in the global index looms

Investors take an interest in Chinese government bonds as possible inclusion in the global index looms
Written by:
Gannicus Oliver
29th September, 06:54
Updated: 29th September, 06:55
  • Index provider FTSE Russell is expected to add Chinese government bonds to its flagship WGBI.
  • If things happen as expected it will give global asset managers benchmarks for tracking their performance.
  • Investors who tap into China's markets stand to reap the benefits for years to come – and so will China.

In 1980, sponsors of China’s Yizheng Chemical Fibers needed capital to create a large-scale chemical fiber plant. Government-owned institutions were unable to assist.

Having nowhere to turn onshore, Yizheng issued bonds worth 50 million USD overseas to raise funds, becoming the first Chinese enterprise in the modern era to enter the international bond market.

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Almost forty years now, and issuers in China don’t have a project offshore to attract foreign capital, and investors are coming to China.

For decades now, investing in China overseas was considered problematic and controlled. Chinese government bonds may be the second largest in the world, but international participation remains very low.

Possible inclusion of Chinese bonds in the central index will be the game-changer

The Chinese government was strongly affected by the COVID-19 pandemic. Still, its market reforms are paving the way for possible inclusion of its government bonds in Index provider FTSE Russell’s flagship World Government Bond Index (WGBI).

The decision came after an annual review last week. Prominent investors are now eyeing Chinese bonds, and the possible inclusion will be a major booster.

Rates strategists at Goldman Sachs, Danny Suwanapruti, said:

If China is included in WGBI, it indicates that it has passed FTSE Russell’s rigorous index inclusion criteria, particularly around market access and traceability.”

He also added:

This opens the doors for several global fixed income investors beyond index trackers, such as total return funds, multi-asset funds, DM bond funds, and central banks.”

China didn’t do well in last year’s WGBI annual review due to long-standing investor concerns, poor liquidity, limited flexibility in foreign exchange settlement, and tight bond settlement cycles.

Ever since, regulators simplified regulations, extended trading hours, and brought market structures in line with global norms.

Suwanapruti said: “A couple of weeks ago, people would have thought inclusion is going to be a close call because there were still some outstanding issues.” The changes in regulations have improved China’s chances of being included in the index, he added.

It is essential to know that the Chinese government bonds are already part of J.P Morgan and Bloomberg Barclay’s index suites, but the one with the largest number of investors is the FTSE WGBI. 

Legitimizing Chinese bonds

Adding Chinese bonds to WGBI would attract more investors, especially as China’s People’s Bank keeps the rate constant, while the rest of the world is reducing rates.

The managing director of State Street Global Advisors, Hiroshi Yokotani, said that Japan’s investors now look at China as a haven to diversify assets. He also added that investors are desperate for yields.

Foreign interest is on the rise. Last week, the biggest exchange-traded fund to invest in CGBs got listed in Singapore.

There are no doubts that investors will need more time to familiarize themselves with the Chinese bond market. Still, the commitment China has already shown to opening up its capital market should give investors and China itself a boost for the future.

Hence, it will be a mistake to overlook the potential of China’s bond market that is going through a historic transformation. Investors who tap into China’s markets stand to reap the benefits for years to come – and so will China.

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