Chinese bonds expected to generate billions of inflows after inclusion of FTSE index

Index provider FTSE Russell gave final approval on Monday for the inclusion of Chinese sovereign bonds in its flagship bond index, starting at the end of the year, paving the way for billions of dollars of inflows into the second largest economy in the world.

The index provider also said India and Saudi Arabia are being considered for potential inclusion and Malaysia is no longer on an exclusion watch list.

Chinese government bonds will be added to the FTSE World Government Bond (WGBI) index over three years from the end of October, FTSE Russell said in a statement.

Chinese government bonds were previously included in the JPMorgan and Bloomberg Barclays index suites, but the inclusion of FTSE WGBI is expected to have a larger effect due to the size of the passive flows that follow it.

HSBC said that with around $ 2.5 trillion following the WGBI, around $ 130 billion in entries could be expected, given China’s final 5.25% weighting – around 3.6 billion dollars. dollars per month.

“From a global perspective, this improves the index’s inclusion statistics – not having the second largest country was a shortcoming,” Binay Chandgothia, portfolio manager at Principal Global Investors said at Hong Kong.

“It will also increase the index’s return a bit,” he said, adding that this would be limited by the modest weighting in China.

The 36-month phased-in is longer than the one-year process that FTSE reported in September. FTSE said a “more conservative” timetable was appropriate given comments from market participants, which had included concerns from Japanese investors over settlement and liquidity.

“We commend China for the considerable progress it has made in market reforms,” ​​said Chris Woods, head of policy and governance at FTSE Russell.

“We will regularly review progress and continue to work with the People’s Bank of China to ensure that its reforms continue to bring tangible improvements to the structure of the market.”

Pan Gongsheng, vice-governor of the People’s Bank of China, said in the FTSE Russell statement that the central bank will support further opening up of the Chinese bond market.

Chinese debt is already increasingly popular with global investors, attracted by its yield and its relative isolation from movements in other bond markets.

Foreign investors held a record 2.06 trillion yuan ($ 318.7 billion) in Chinese government bonds (CGBs) in February, even as premiums against US debt contracted as a liquidation of bonds affected world markets.

Benchmark 10-year CGBs returned 3.209% on Monday, compared to 1.7116% at 10-year in the United States.