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UBS AM: Indices to include China bonds in 2017

Chinese government bonds could be included in the global benchmark indices next year, according to Hayden Briscoe, Asia-Pacific head of fixed income at UBS Asset Management.

“We have a high probability that over 2017 Chinese government bonds will be going into everybody’s indices,” he said at a briefing on Tuesday.

The firm estimated a 7% weighting would translate to about $3trn of inflow.

Briscoe argued it could be a game-changer for RMB, while many emerging market currencies could suffer a further devaluation due to expectations of protectionism.

“If the index inclusion happens in 2017, there will be a large inflow into RMB,” he said, adding that it would serve as a counterbalance to concerns about persistent capital outflows from China. 

He noted that China yields are better than some developed markets. “With [China’s] inflation rate at about 1.5-2%, we are still getting a positive real yield in Chinese government bonds, which looks relatively attractive.”

Among global developed market sovereign bonds, 29% currently hold a negative yield to maturity, the firm noted.

RMB depreciation

Standard Chartered earlier stated that the inclusion of China bonds on global indices could take place in the coming few months, but opinions vary among industry players.

Fullerton Fund Management, the Singapore-based subsidiary of Temasek, said it believed a few years are needed.

“Various developments such as the new China interbank bond market (CIBM) scheme and refinements to existing schemes have simplified foreign investor access, which help facilitate index inclusion. We expect more announcements in the coming months as the dialogue between the People’s Bank of China and foreign investors continues,” the firm said in an email reply to FSA.

The appeal of Chinese bonds is “their diversification benefits, with lower correlations to both US Treasuries and other Asian bonds,” the firm noted.

However, the RMB has depreciated 6.6% against the greenback, or roughly 5% against a basket of currencies since the beginning this year. Further sliding could impact returns.

In fact, Fullerton said the biggest risk for onshore China bonds is a more aggressive RMB depreciation stance by the central bank. “However, this is not our base case as we believe the authorities would prioritise economic stability ahead of the upcoming Chinese leadership transition in late-2017.”

Dawn Fitzpatrick, UBS AM’s head of equities, multi-asset and hedge fund teams, said the yuan has remained relatively stable against the trade-weighted basket of currencies.

“We’ve only seen the devaluation against the US dollar, as it intended to do so when the US dollar strengthens against other currencies. We don’t expect to see a [sharp] devaluation of the RMB.”

Part of the Mark Allen Group.