Caixin
Jan 25, 2017 07:37 PM
FINANCE

Global Benchmark Adds China Bonds in New Index, Boosting Foreign Appeal

(Beijing) — China’s government and corporate bond markets are edging toward a bigger role in global fixed-income investment as a result of a move to create a new index that adds yuan-denominated bonds to Bloomberg Barclays Indices’ flagship Global Aggregate Index.

Financial-data provider Bloomberg LP, which runs the fixed-income investment index, said Tuesday it will soon create a new index that combines components of the existing China Aggregate Index with the Global Aggregate Index.

The latter now follows fixed-income activity in 24 currency markets around the world, including developed and emerging markets. Until now, the index has excluded yuan-denominated bonds, which were fully opened to foreign investors last year.

China bonds will be included in the new index starting March 1, when it will add government bonds and policy bank bonds now tracked by the China Aggregate Index, Bloomberg said. These bonds trade on the China Interbank Bond Market.

Sources close to the People’s Bank of China told Caixin that the move is part of a transitional arrangement that’s expected to lead to full incorporation of all of China’s government and corporate bonds into the Global Aggregate Index. The sources did not say how long the transition may last.

“China’s inclusion in a major global bond index will have a great effect on the Chinese bond market” because it will attract more overseas investors to the China bond market, said Christopher Lee, Hong Kong-based managing director of corporate ratings at Standard & Poor’s.

Lee said Chinese bonds appeal to foreign investors, particularly pension funds and sovereign wealth funds, looking for long-term investments.

As part of the transition, Bloomberg announced, the minimum bond issue for inclusion in the China Aggregate Index will be increased March 1 to 5 billion yuan ($729 million) from 1 billion yuan for government bonds, and to 1.5 billion yuan from 1 billion yuan for corporate bonds.

Until now, the 13-year-old China Aggregate Index has included fixed-rate yuan products maturing in one year or more. It excludes convertible securities, structured products and private placements.

Li Linan, a senior analyst at Deutsche Bank, said that once Chinese bonds are included in the Global Aggregate Index, so-called passive investors will likely increase their participation in the China market. These investors closely follow changes that affect the world's major indices and allocate their assets accordingly, he said.

Foreign investors are expected to buy up to 800 billion yuan worth of yuan-denominated bonds in China within the next 10 years, Li said. About 60% of those buyers will be foreign central banks, and the rest institutional investors, she said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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