FTSE Russell moves forward with inclusion of Chinese government debt in flagship index as world’s second-largest bond market opens to foreigners

Chad Bray
·3-min read

FTSE Russell said on Tuesday that it would go ahead with its plans to include Chinese sovereign debt in a flagship government bond index beginning in October, marking the latest milestone in the opening up of China’s US$16 trillion bond market to foreign capital.

The index provider, owned by the London Stock Exchange Group, said it would add Chinese sovereign debt to its World Government Bond Index over three years. China’s weight in the index will be around 5.25 per cent, the sixth largest following the US, Japan, France, Italy and Germany.

“The decision to add the second-largest bond market in the world to our flagship global government bond index reflects our robust index governance process and regular engagement with global investors, regulators and other key market participants,” Waqas Samad, FTSE Russell’s CEO, said in a press release.

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FTSE Russell first announced plans to add Chinese debt to its World Government Bond Index in September 2020 after declining to follow its competitors and do so during its index review in 2019. JPMorgan Chase and Bloomberg Barclays previously unveiled programmes to phase in the yuan-denominated notes into their indices beginning in 2019.

The index provider said it had studied recent reforms to make international investors’ participation in Chinese bond markets easier following its decision not to include Chinese debt in its government bond index two years ago.

Investment bank Goldman Sachs said on Tuesday it was raising its forecast for inflows into Chinese debt to between US$150 billion and US$180 billion this year, from US$120 billion to US$140 billion before FTSE Russell’s announcement.

Greater appetite for Chinese debt comes as Beijing further opens up its financial markets to overseas investors, including through Bond Connect, allowing qualified foreign investors to buy Chinese bonds without setting up an onshore business.

Foreign investors hold roughly 3.6 per cent of China’s domestic bond market and are gradually adding to their portfolios. They are attracted by the relatively high yields offered and as a means of diversification of risk. China’s 10-year government bond yield was 3.26 per cent on Tuesday, almost double that of the 10-year Treasury note at 1.75 per cent.

As of the end of February, foreign investors’ holdings of Chinese bonds reached 3.7 trillion yuan (US$563 billion), according to Pan Gongsheng, deputy governor of the People’s Bank of China and director of State Administration of Foreign Exchange.

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The inclusion also comes against the backdrop of heightened Sino-China tensions, including moves to delist Chinese companies from American bourses with purported ties to the Chinese military and concerns by some investors about settlement and liquidity issues involving Chinese debt.

To alleviate some of those concerns and following feedback during a market consultation, FTSE Russell said it would take a “more conservative implementation schedule” than the one-year period initially envisioned in September. Analysts noted that inclusion over 36 months would flatten the inflows, with Standard Chartered estimating the average monthly boost at about US$4 billion.

Chinese government debt would comprise a 5.25 per cent weighting in the index when fully included, FTSE Russell said.

“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,” Chris Wood, FTSE Russell’s head of policy and governance, said.

Additional reporting by Alison Tudor-Ackroyd

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