Index Inclusion Seen Making China Bond Market No. 2 Globally

(Bloomberg) -- The inclusion of Chinese bonds into the Bloomberg Barclays Global Aggregate Index will lead to more than $100 billion of foreign inflows, putting the nation’s $13 trillion debt market on track to overtake Japan’s as the world’s second largest, analysts say.

• Some of China’s onshore government and policy bank bonds will be included in the Bloomberg Barclays index over a 20-month phased-in process starting April 1
• Upon completion, 364 Chinese securities will account for 6.1 percent of the $54.9 trillion debt covered by the index, according to its announcement
• Currently, foreign central banks and sovereign wealth funds are the biggest overseas buyers of Chinese bonds; the inclusion may prompt more money managers to pile in
• Other index compilers, such as FTSE Russell and JPMorgan Chase & Co., are considering adding China’s debt to their gauges too
• Overseas investors hold a 2 percent share of the entire onshore bond market, and own around 8 percent of sovereign notes
• Despite the inclusion, China’s government bonds tumbled on Monday as better-than-expected economic data damped hopes for monetary easing; the benchmark 10-year yield jumped 8 basis points, the most since October 2017, to 3.15 percent
• Note: Bloomberg LP owns Bloomberg Barclays indexes and Bloomberg News
• Read: Why China’s Bond Market Is About to Get Less Exotic: QuickTake

Australia & New Zealand Banking Group (Khoon Goh, head of Asia research)

• Asset managers tracking the Bloomberg Barclays index will buy $150 billion of Chinese bonds in the coming 20 months
• Foreign ownership of government and policy bank bonds will rise to 7 percent by end-2020 from the current 5.2 percent
• Possible inclusion in the FTSE Russell World Government Bond Index will lead to inflows of $100 billion, and potential addition to a JPMorgan index will see $25 billion of foreign purchases
• Global investors will buy more Chinese equities, and overseas central banks will allocate more of their foreign reserves into the yuan; that will help offset the narrowing of China’s current-account surplus and support the yuan
• The share of yuan assets in global foreign reserves will rise to 4 percent in 2020 from 2.4 percent at end-2018
• China’s bond market is on track to overtake Japan’s to become the world’s second largest "very soon"
• There has been minimal front-running by investors seeking to position themselves ahead of the index inclusion because asset managers need to set up systems and sort out administrative issues before entering a new market
• Inflows over the first few months will likely be low as some asset managers may not be operationally ready

Deutsche Bank AG (Linan Liu, greater China rates and foreign-exchange strategist)

• China will see $120 billion of inflows in the coming 20 months on the index inclusion
• Over the next five years, China will see $500 billion of passive inflows if other major index compilers add onshore debt; overseas central banks and monetary authorities will buy $850 billion of Chinese bonds during the same period
• Foreigners will own 5 to 6 percent of onshore bonds in the coming five years, if other indexes also include Chinese notes

Invesco Hong Kong Ltd. (Ken Hu, chief investment officer)

• Foreign ownership of onshore bonds will rise to 13 percent over the next five years; if that happens, China will see at least $1.2 trillion in capital inflows
• Chinese bonds have low correlation with other assets as the nation runs on a very different economic cycle than other major economies; the debt also offers attractive yields and the yuan has been strong
• Domestic bonds will be rated according to international standards, and this will help foreign investors familiarize themselves with the Chinese corporate bond market
• China’s bond defaults are at low levels and they remain within an appropriate range

UBS Asset Management (Hayden Briscoe, head of fixed-income for Asia Pacific)

• The index inclusion is "a major change for global capital markets," and will soon propel the China’s bond market past Japan as the second largest in the world
• Other index providers will bring China into their global bond aggregates, which will also prompt investors to follow their benchmarks by increasing their allocations in onshore debt
• China’s ongoing reforms and improving accessibility, the process of index inclusion and the rise of yuan as a reserve currency will bolster the position of the nation’s sovereign notes as haven assets

Standard Chartered Plc (Becky Liu, head of China macro strategy)

• China to see more than $120 billion of passive inflows on the back of the Bloomberg Barclays inclusion
• This is a good catalyst for China to further open up its domestic capital market, especially given a potential narrowing in the current account surplus
• There are concerns regarding limited access to the domestic foreign-exchange market for hedging purposes and a lack of availability of interest-rate derivatives

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Annie Lee in Hong Kong at olee42@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Ron Harui, Philip Glamann

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