FTSE Russell to include Chinese sovereign debt

FTSE Russell is to include Chinese sovereign debt in a flagship government bond index, which may lead to around US$150 billion of new inflow into the Chinese bond market this year.

The leading global multi-asset index compiler confirmed on Tuesday that Chinese government bonds will be included in the FTSE World Government Bond Index and its derived indexes from the end of October.

The confirmation is based on affirmation with members of the FTSE Russell advisory committees and other index users that ongoing reforms to the Chinese government bond market warrant inclusion in the WGBI, the company said.

The phased inclusion will occur over 36 months from October 29 to October in 2024 to ensure an orderly transition for markets and investors.

The inclusion period has been lengthened from the 12 months of the last index announcement in September 2020 to better suit the passive investing nature of most WGBI trackers.

The company estimates that China's WGBI weight is currently at 5.25 percent, which implies a rise of around 0.15 percentage points per month over the 36-month period. 

CGBs issued before January 1 last year will be included in the index if the bonds meet the minimum size threshold of 100 billion yuan (US$15.23 billion), while those issued after January 1 are eligible for inclusion if the outstanding stock is at least 35 billion yuan. 

"Based on the current list of outstanding CGBs and the CGB issuance calendar for 2021, we estimate that there will be 51 CGBs eligible for inclusion when the inclusion period begins in November, with an average modified duration of around 5-6 years," said Andre de Silva, head of global emerging market rates research at HSBC.

Assuming that the size of tracking assets under management is US$2.5 trillion, the WGBI inclusion process is likely to result in inflows of around US$130 billion into China's government bond market, according to HSBC.

This works out at an average monthly inflow of around US$3.6 billion over the 36-month period. As a comparison, foreign investors bought around US$7 billion of CGBs per month last year.

Investment bank Goldman Sachs, meanwhile, said 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.

Compared with the Bloomberg-Barclays Global Aggregate Index and JP Morgan Emerging Market Government Bond Index which have already included China bonds, WGBI has a wider passive investor following.

"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," said Waqas Samad, CEO of FTSE Russell.

Pan Gongsheng, deputy governor of the People’s Bank of China and director of State Administration of Foreign Exchange, said: ”China’s economy has good growth prospects. And with the steady progress of financial reforms and the opening of the market, yuan assets are showing strong resilience and certain hedging characteristics and their attractiveness continues to rise."

At the end of February this year, foreign investors’ holdings of Chinese bonds had reached 3.7 trillion yuan. 

"Going forward, we will continue to work to actively improve relevant regulations and policy arrangements and promote the further opening of China’s bond market to international investors," Pan said.