In March, Citi announced that it will include China in its emerging market and regional government bond indices, as reported. Its three indices, the Emerging Markets Global Bond Index, the Asian Government Bond Index and the Asia Pacific Government Bond, will include Chinese government bonds starting in February next year.
Besides Citi, Bloomberg Barclays also launched two new indices to include Chinese sovereigns: the Global Aggregate + China Index and the Emerging Market Local Currency Government + China Index.
“The inclusion automatically puts [China bonds] on a global index, where the passive money that tracks it has to go in,” said Seth, speaking at a media briefing in Hong Kong.
He believes it will take 12-18 months for a majority of fund managers to adjust their allocations to China bonds and be reflected in the percentage of foreign inflows.
Currently, the size of the Chinese onshore bond market has crossed the $10trn mark. However, the proportion owned by foreign investors remain small at 2%-3%, according to Seth.
“This is significantly lower than any major bond market in the world.”
Foreign ownership of bonds in other markets is far higher. For example, in the Australian bond market it is 55%, in Malaysia 42%, in Indonesia, 39% and in Japan around 10%.
“It is absolutely critical if you are a fixed income investor to have a closer look at the Chinese bond market and then figure out the access as well as the positioning,” Seth added.
Andy Seaman, Stratton Street Capital’s London-based partner and chief investment officer, also believes that foreign investors cannot ignore Chinese bonds after their inclusion in global indices.
The inclusion has huge implications for fund managers in the future, he said. For example, if the renminbi appreciates against the dollar, anyone following the old global aggregate index will significantly underperform those managers who are following the new one.
“Most people haven’t appreciated the scale of the demand for the renmibni in the future, and that is something to keep an eye on,” Seaman said.
Higher yields
Within the Chinese onshore bond market, Blackrock’s Seth likes higher-quality government bonds, policy banks and the quasi-sovereign space, but he is selective on credit because of the valuations.
Yields on Chinese onshore bonds have been higher than their developed market counterparts, according to a DBS report. For example, ten-year Chinese government bond yields stood at 3.57%, compared to UK Gilts’ 1.89% and US Treasuries’ 2.34%. In the corporate space, five-year notes in China pay around 5% versus Asian AAA-rated dollar bonds’ 3%.
Foreign investors can access the onshore Chinese bond market via different routes, such as the qualified foreign institutional investor (QFII) and the renminbi foreign institutional investor (RQFII) schemes, the China Interbank Bond Market (CIBM) and the Hong Kong-China Bond Connect, which was launched at the beginning of this month.
