The index provider said it plans to add Chinese RMB-denominated government and policy bank bonds to the widely-tracked Bloomberg Barclays Global Aggregate Index. They will be phased in over a 20 month period beginning April 2019.
The bonds have been included because China’s central bank has brought local currency fixed income securities to a level that meets the index’s requirements, according to a statement from Bloomberg.
In Bloomberg Barclays index family, the index components must be classified as investment grade and its currency must be freely tradeable, convertible, hedgeable, and free of capital controls.
However, Gordon Ip, chief investment officer for fixed income at Value Partners, does not think the inclusion will have a huge impact on the market. He sees it as a potential catalyst prompting other major fixed income indices, namely the Citi World Government Bond Index (WGBI), to include China onshore bonds.
“The development is going to take some time but the inclusion is positive to the onshore market in the long run,” Ip said.
He noted that the main challenges in China’s onshore bond market have been a burdensome requirement involving pre-funding a trade and the lack of liquidity. They apply to both channels for foreign investors — the China Interbank Bond Market scheme and the Bond Connect programme.
Low activity
Currently, foreign investors can access onshore bonds through the China Interbank Bond Market, which opened last year to foreign investors, and through quota programmes, such as the Bond Connect, the Qualified Foreign Institutional Investor and the Renminbi Qualified Foreign Institutional Investor programmes.
Foreign participation in the onshore bond market is small. In the first three quarters of 2017, foreign investors accounted for about 2% of China’s RMB 60trn ($9.10trn) bond market, according to data from the China Central Depository and Clearing Company.
Luc Froehlich, Fidelity’s head of investment directing for Asian fixed income, believes the index inclusion will help to increase foreign participation in the onshore bond market.
“To date, China has been largely absent from the portfolios of foreign bond investors,” he said. “This change will therefore help redress the imbalance of global funds toward the existing core markets of US dollar, Japanese yen and euro, and will improve their diversification and yield potential.
“While the addition of these securities will be phased in gradually from April 2019, it will now be a race for asset managers to ensure they have sufficient coverage and expertise in place.”
More indices
Bloomberg said additional enhancements are required prior to the planned inclusion of China’s bonds. They include the ability to allocate block trades across portfolios and clarification on tax collection policies.
Using the data as of end of January, the index is expected to include 386 Chinese bond and represent 5.49% of the $53.7trn-worth index. The adjustment would make renminbi the fourth largest currency component, after US dollar, euro and Japanese yen.
In addition to the Global Aggregate Index, Chinese local currency debt will also be included in the Global Treasury and EM Local Currency Government Indices beginning April 2019. Meanwhile, Bloomberg will create indices excluding China for index users who wish to track the original benchmarks.
Last month, Citi’s three indices – Citi’s Emerging Markets Government Bond Index (EMGBI), Asian Government Bond Index (AGBI), and the Asia Pacific Government Bond Index (APGBI) – started including Chinese government bonds.
