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FTSE Russell lists China in global bond index

Bloomberg September 25 | Updated on September 25, 2020 Published on September 25, 2020

London Stock Exchange-owned index compiler says the debt will feature in the flagship World Government Bond Index

Chinese sovereign bonds have won inclusion into FTSE Russell’s benchmark bond index a year after they were rejected.

The index compiler owned by the London Stock Exchange Group said the debt would be added to its flagship World Government Bond Index. The inclusion will start in October 2021, according to a statement after U.S. markets closed Thursday.

The inclusion gives foreign investors yet another way to invest in Chinese debt and should prompt inflows into the world’s second-largest bond market. Morgan Stanley said it would probably attract as much as $90 billion starting next year. FTSE Russell becomes the last of the three main index compilers to add Chinese debt after Bloomberg Barclays and JPMorgan Chase & Co.

This is a new milestone, said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “It is a new catalyst as well given the huge potential for foreign capital inflows considering FTSEs weight and influence. Foreign ownership of Chinese assets will increase significantly — I’d say it would at least double.”

The higher yields on Chinese sovereign bonds have been attractive to investors from around the world given the returns on most notes in developed nations are near zero. China’s rate premium over the US debt is near the highest level on record.

Inflows into the nation’s debt market from abroad have jumped nearly 40 per cent each year since 2017 to a record $383 billion as of the end of June, data from the People’s Bank of China show. Foreigners still account for less than 3 per cent of the $16-trillion market.

When FTSE Russell rejected Chinese debt for inclusion a year ago it cited the need for greater secondary market liquidity, as well as increased flexibility in foreign exchange execution and the settlement of transactions. China has made a number of reforms to its bond market since then, some of them touching on those issues. In April, the index compiler acknowledged that China had addressed calls to increase market accessibility and provided investors with greater currency trading options and improvements to liquidity.

Chinese government bonds have fallen for five straight months, taking the yield to around 3.10 per cent. The notes have been under pressure amid concern about tighter liquidity, a central bank that has avoided cutting interest rates and growing appetite for riskier assets as an economic recovery from the virus pandemic accelerates. The nation’s benchmark CSI 300 Index is trading near the five-year high it reached in July.

Expectations that FTSE Russell would add Chinese bonds to its indexes have helped sentiment for China’s yuan. The currency has surged about 3.5 per cent this quarter, the most in Asia.

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Published on September 25, 2020
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