Caixin
Mar 24, 2018 05:08 AM
FINANCE

Bloomberg to Add China Bonds to Major Index

China’s $11 trillion bond market is now the world's third-largest. Photo: VCG
China’s $11 trillion bond market is now the world's third-largest. Photo: VCG

China’s yuan-denominated bonds will be added into Bloomberg Barclays Global Aggregate Index next year, marking the Chinese debt market’s first inclusion by a major global gauge.

Bonds to be added into the index will be limited to China’s yuan-denominated government and policy bank bonds, according to a Bloomberg statement on Friday. The inclusion will be completed over a 20-month period starting in April 2019.

Once fully added, Chinese bonds would make up 5.49% of the $53.73 trillion index, based on data as of Jan. 31, 2018. That would make it the fourth-biggest currency in the benchmark after the U.S. dollar, euro and Japanese yen.

"Today's announcement recognizes China's continued efforts over recent years to enhance access to the world's third-largest bond market," said Michael Bloomberg, founder of Bloomberg LP.

However, Bloomberg cautioned that China needs to continue taking steps to increase investor confidence and improve market accessibility to avoid a delay in the planned timetable. Needed steps include the implementation of delivery versus payment settlement, the ability to allocate block trades across portfolios, and clarification of tax-collection policies.

China’s domestic bond market has ballooned to more than $11 trillion. Yet its exposure to overseas investors has remained limited, partly due to its absence in major international indexes. Analysts with Goldman Sachs last year estimated that inclusion by major global indexes could spark inflows of up to $250 billion into China’s bond market by 2020.

Chinese regulators have stepped up efforts to open up the country’s bond market while streamlining market regulations to entice overseas investors.

Last July, China launched the Bond Connect program, allowing eligible offshore investors to trade and settle mainland bonds through a Hong Kong-based custodian and clearing service without any quota.

In January, daily transactions in the Bond Connect program stood at between 2 billion yuan and 3 billion yuan, according to the official Xinhua News Agency. But holdings of overseas investors still account for less than 2% of the entire Chinese bond market, official data show.

Pan Gongsheng, deputy governor of the People’s Bank of China, told Caixin in a telephone interview on Friday that the Bloomberg inclusion reflects global investors’ recognition of efforts to open up China’s bond market and confidence in the country’s economic growth.

“The inclusion of Chinese bonds will increase the attractiveness of the Bloomberg Barclays index and help international investors to optimize their portfolio. It will also help promote China’s bond market reform and enhance the international influence of China’s financial market,” Pan said.

Bloomberg said that in order to be considered for inclusion in the Global Aggregate Index, a local currency debt market must be classified as investment grade and its currency must be freely tradable, convertible, hedgeable and free of capital controls.

“The ongoing enhancements from the People’s Bank of China have resulted in yuan-denominated securities meeting these absolute index rules,” the company said.

Other major indexes — JPMorgan’s Global Emerging Market Bond Index and London Stock Exchange’s World Government Bond Index (WGBI), formerly owned by Citigroup Inc. — are also considering adding Chinese bonds.

Liu Ligang, chief China economist of Citigroup, told Caixin that JPMorgan is likely to move faster than the WGBI to include Chinese bonds, but both will require a long preparation period.

Ivan Chung, head of Greater China credit research at Moody's Investors Service in Hong Kong, said China’s government and policy bank bond market is more developed and accepted by overseas investors than its corporate bond market, which won’t be included in the Bloomberg index.

Due to insufficient liquidity at the secondary market and inadequate information-disclosure practices, China’s corporate bond market faces greater challenges to being included into major global benchmarks, Chung said.

Pan told Caixin that the central bank will continue reform regulations and market arrangements to improve the accessibility of the bond market.

This week, the central bank, which regulates the country's biggest bond market, has restarted discussions with the securities watchdog, which oversees the smaller exchange-traded bond market, to try to agree on how to enforce regulations across both platforms. The bank is also drafting rules to unify information-disclosure requirements for corporate bonds issued in both markets, as an effort to streamline the supervision in the market.

Contact reporter Han Wei (weihan@caixin.com)

Read more on the latest China-U.S. trade dispute

You've accessed an article available only to subscribers
VIEW OPTIONS
Share this article
Open WeChat and scan the QR code
GALLERY