Hundreds of Chinese yuan-denominated government and policy bank securities are being phased into the Bloomberg Barclays Global Aggregate Index over a 20-month period, which began on April 1, 2019.
The move is a huge step in China’s chapter of opening up to foreign investors, with HSBC predicting up to $150 billion of foreign inflows into the nation’s $13 trillion-dollar bond market – the third largest in the world.
Once completed, the index will include 363 Chinese securities, representing 6.03% of the $54.07 trillion index. At that point, the yuan will become the fourth-largest currency component.
“Tracked by around $2.5 trillion of assets under management, it is one of the world’s most important bond indices,” David Liao, president and chief executive of HSBC China wrote on the bank’s website. “This change means that many asset managers and ordinary savers around the world are set to increase their exposure to a market that is still underrepresented in global investment portfolios,” he added.
Owning just 2% of onshore domestic bonds, foreign investors are aware of the opportunities the latest milestone presents. “Global investors would have the opportunity to invest in the third-largest bond market in the world, get the portfolio diversification benefit, obtain relatively higher bond yield compared to other developed bond markets and exposure to Chinese yuan bond and currency returns,” said Kheng-Siang Ng, Asia Pacific head of fixed income at State Street Global Advisors.
“The increasing foreign investor inflows should create a healthy mix of investor and trading flows as well as improved liquidity. We expect this to accelerate onshore bond market development to become more matured and sophisticated like other developed markets,” added Ng.
The opening of China’s $12 trillion bond market “might be the most pivotal change to global capital markets” over the coming years, according to JP Morgan Asset Management (JPMAM), but investors must successfully navigate the headwinds.
“The challenge and opportunity for investors will be extracting the best possible return for the lowest level of risk across onshore, offshore (dim sum) and dollar bond markets,” said Jason Pang, portfolio manager at JPMAM. “We believe the best alpha opportunities in China are in cross-border investment, meaning being active across CNY [Chinese yuan/onshore RMB], CNH [offshore RMB] and USD bond markets (hedged into RMB),” he added.
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