More global investors will soon have access to China’s massive bond market

China’s sovereign debt is set to be added in another benchmark bond index, World Government Bond Index (WGBI), possibly bringing from $100 to $150 billion worth of foreign investment to the world’s second largest bond market.

In a landmark decision announced on Thursday, British index provider FTSE Russell said Chinese government bonds will be added to the key index that includes mostly developed economies from October next year. The inclusion of around $1.5 trillion out of China’s $16 trillion bond market is set to be additionally confirmed in March 2021.

“Since being placed on the watch list, Chinese authorities have implemented significant improvements to the fixed income market infrastructure, facilitating easier participation by international investors,” FTSE Russell said in a statement. It added that the developments include improving secondary market bond liquidity, enhancing the foreign exchange market structure and developing global settlement and custody processes. 

Chinese government bonds were earlier included in the JPMorgan and Bloomberg Barclays index suites and joining WGBI will mark another milestone for the rapidly developing Chinese bond market, especially at times when investors are scrambling for higher yields.

China has the world’s second-largest bond market, but international investors held 2.8 trillion yuan ($410.69 billion) of Chinese bonds or less than three percent of the entire market as of the end of August. 

The debut on the index may bring at least $100 billion into the Chinese economy, some analysts predict, while others say that the inflow could be 40 percent or even 50 percent bigger. According to fixed income portfolio manager at JPMorgan Asset Management, Jason Pang, China may raise around $140 billion in additional inflows into its debt as a result of the decision, while HSBC reportedly estimates the attracted funds could top $150 billion.

“Overseas investors have been purchasing more China bonds this year with a decent return amid the global zero-rate environment, ongoing global reserve diversification and inflows as a result of the two prior bond index inclusion,” Candy Ho, HSBC’s global head of RMB business development in its global markets unit said as cited by South China Morning Post. “The FTSE WGBI index inclusion will further accelerate global investors’ participation.”

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