Index provider FTSE Russell gave final approval on Monday for inclusion of Chinese sovereign bonds in its flagship bond index, starting later this year, setting the stage for billions of dollars of inflows into the world’s second-largest economy.
The index provider also said India and Saudi Arabia were being considered for potential inclusion, and that Malaysia was no longer on a watch list for exclusion.
Chinese government bonds will be added to the FTSE World Government Bond Index (WGBI) over three years from the end of October, FTSE Russell said in a statement.
Chinese government bonds were previously included in index suites from JPMorgan and Bloomberg Barclays, but FTSE WGBI inclusion is expected to have a larger effect due to the size of passive flows tracking it.
HSBC said that with roughly $2.5 trillion tracking the WGBI, some $130 billion in inflows could be expected, given China’s eventual 5.25% weighting — about $3.6 billion a month.
“From a global perspective, it improves inclusion statistics of the index — not having the second-largest country in it was a gap,” said Binay Chandgothia, a portfolio manager at Principal Global Investors in Hong Kong.
“It will also pull up the index yield a bit,” he said, though adding that would be limited by China’s modest weighting.
The 36-month phase-in is longer than the one-year process FTSE had flagged in September. FTSE said “a more conservative” schedule was appropriate because of feedback from market participants, which had included concerns from Japanese investors around settlement and liquidity.
“We commend China on the great progress it has made in market reforms,” said Chris Woods, head of policy and governance at FTSE Russell.
“We will revisit progress on a regular basis and continue to work with the People’s Bank of China to ensure that its reforms continue to yield tangible improvements to market structure.”
Pan Gongsheng, deputy governor at the People’s Bank of China said in the FTSE Russell release that the central bank would promote the further opening of China’s bond market.
China’s debt is already increasingly popular with global investors, attracted by its yield and its relative insulation from movements in other bond markets.
Foreign investors held a record 2.06 trillion yuan ($318.7 billion) of Chinese government bonds (CGBs) in February, even as premiums over U.S. debt shrank as a bond sell-off dented global markets.
Benchmark 10-year CGBs yielded 3.209% on Monday, compared with a 1.7116% U.S. 10-year yield.
