PBOC welcomes Chinese bonds inclusion in FTSE Russell_china

Andrew Cummings
September 26, 2020

'Over the past 20 years, China's bond market has grown more than sixtyfold to almost $14 trillion'.

Since being added to the FTSE watch list for WGBI inclusion in 2018, Chinese authorities have implemented significant improvements to the fixed-income market infrastructure to expand access to worldwide investors, including improving secondary market bond liquidity, enhancing the foreign exchange market structure, and developing global settlement and custody processes, FTSE Russel said in a statement.

China's government bonds gained acceptance into one of the world's most coveted bond benchmarks, the FTSE Russell WGBI.

As a result, investors in numerous bond funds and fixed income exchange traded funds will automatically gain exposure to the Chinese bond market, the second largest such market in the world after the U.S.

Goldman Sachs estimates there is $2.5 trillion of global cash following the WGBI, and China's inclusion could drive some $140 billion into mainland bonds over the inclusion period.

The region's bank index hit a new record low, oil and gas stocks were down more than 6% for the week, and a sea of red on US futures markets meant September was set to be the worst month globally since March's maelstrom.

"Improving secondary market bond liquidity through further progress on the establishment of a Debt Management Office, an improved Auction Calendar that offers more re-opening of prior issues, a greater number of MGS available via repo, consolidation of bond issuances to increase the outstanding size per issuance and reducing the number of issuances and introducing MGS futures with physical delivery". "Subject to affirmation [by FTSE] in March 2021, global investors will be able to access the second largest bond market in the world through FTSE Russell's flagship WGBI".

FTSE Russell says it will consult with market participants and index users on the accessibility conditions for foreign investors in these markets and will consider their inclusion on the watch list for inclusion in the FTSE Emerging Market Government Bond Index (EMGBI).

Pan Gongsheng, deputy governor at the People's Bank of China, said worldwide investors held 2.8 trillion yuan ($410.12 billion) worth of Chinese bonds at the end of August. The market has continued to expand in depth and breadth and worldwide investments in the market have grown by 40% per annum over the last three years: as at the end of August 2020, global investors held 2.8 trillion yuan (US$351.48 billion) of Chinese bonds.

Wesley Yang, head of financial markets at Standard Chartered Bank China, said the inclusion announcement makes worldwide investors highly expectant about further opening-up of China's bond market, and Standard Chartered Bank China is willing to take part in it.

Xing Zhaopeng, an economist at Australia & New Zealand Banking Group Ltd., told Bloomberg that the inclusion represents a "new milestone".

Potential foreign inflows into Chinese federal government financial obligation.

Jason Pang of JP Morgan Asset Management said that while foreign ownership of CGBs had risen to around 9 per cent from 2 per cent in recent years, it was still well below the 15-30 per cent seen in other Asian markets.

High-yielding Chinese sovereign bonds are particularly attractive to investors since near-zero interest rates in Europe and the US provide their notes with very little return. (In contrast, the 10-Year U.S. Treasury has a yield of about 0.67%).

"I think this is another important landmark in China's. internationalization of their domestic financial markets", Ben Powell, BlackRock Investment Institute's chief investment strategist for Asia Pacific, told CNBC.

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