Why Inclusion of Chinese Bonds in Global Indices is Big News

With yesterday’s announcement by Bloomberg of the addition of bonds from the Chinese interbank bond market into a parallel index to the Bloomberg Barclays Global Aggregate Index, China’s bond market has been thrust into the limelight.

Why is this important?

China’s bond market has grown to become the 3rd largest in the world, with $9.4 trillion in outstanding debt. The RQFII program announced in 2011, and a scrapping of quotas for most institutional investors, announced last year, have gradually opened the market to foreign investors, yet due to capital controls, opaqueness, and difficulty in understanding the risks, foreigners still only hold around 2.5% of the market.

The inclusion of Chinese bonds in global indices will accelerate foreign inflows. With a parallel index institutional investors will still have a choice, rather than be mandated, whether or not to include Chinese bonds in their portfolios. But the move will increase awareness of the opportunities in the China market, and force investors to start exploring investment ideas. With yields significantly higher than other markets (e.g. China 10 year yield is 3.33% versus 2.52% in the US, 1.68% in HK, and 0.46% in Germany), and a currency 10% cheaper against the USD than 2 years ago, there is plenty to attract investors.

As new participants enter the market we are also likely to see a rapid increase in sophistication in how the market operates. Although only Government and Policy Bank Bonds will be included initially, inclusion of other bond types, such as  MTNs and Enterprise Bonds, will likely follow. Having a broader investor base will result in better pricing of credit, demand for higher rating standards, and introduction of additional credit analytics such as default probabilities and implied ratings.

BondIT provides investors with a platform that brings a digital approach to bond portfolio construction and management. Thanks to our strategic partnership with Wind Information we can support foreign investors who are investing in, or considering participating in, the onshore Chinese bond market.