Foreign ownership in China’s bond market reached a record high this year but remains low © Reuters

Chinese government debt is set to be added to one of the world’s most important bond indices, paving the way for an estimated $140bn to flow into the country’s rapidly liberalising capital markets.

FTSE Russell announced late on Thursday in the US that China would next year join its World Government Bond index, which influences the allocation of trillions of dollars invested in sovereign bonds around the world.

The inclusion, subject to confirmation in March, is a milestone for the world’s second-largest bond market, where a longer-term rise in foreign participation has gathered pace this year despite worsening relations between China and the US.

“China’s bond market liberalisation is not a one-off event . . . it’s more of a secular trend that’s been happening over time,” said Jason Pang, fixed income portfolio manager at JPMorgan Asset Management.

Foreign ownership in China’s bond market reached a record high this year but remains low. Mr Pang pointed to data from information provider Wind showing that foreign investors own around 9 per cent of China’s government debt market, up from 2 per cent a few years ago.

He estimates further inflows of around $140bn into Chinese debt as a result of the decision, mainly through passive funds that track bond indices. Goldman Sachs projects a similar amount of inflows.

$140bn Potential foreign inflows into Chinese government debt

The decision from FTSE Russell, owned by the London Stock Exchange Group, follows China’s inclusion in a similar Bloomberg Barclays index in 2019, as well as a JPMorgan emerging market bond index.

Last year, FTSE Russell declined to include China in the index, citing feedback from users that wanted better secondary market liquidity and transaction settlement.

Ahead of this week’s decision, Hong Kong’s CSOP Asset Management launched a new Chinese government bond exchange traded fund in Singapore, which is widely expected to be the world’s largest.

Low bond yields globally, at a time when central banks have unleashed monetary stimulus to combat the coronavirus pandemic, have enticed investors into the Chinese market. China’s 10-year government bonds currently yield 3.077 per cent, compared to 0.67 per cent for the equivalent US Treasury.

Mr Pang added that debt issuance by local and central government in China had increased supply, helping to push yields higher. The Chinese economy has rapidly recovered from the initial hit of Covid-19, with the government supporting industrial production.

Improving access to China’s bond market, such as the launch of the Bond Connect programme in Hong Kong in 2017, has also lured foreign investors.

The country “has hit a key milestone in terms of access and tradability that’s going to attract a lot of investors”, said Danny Suwanapruti, head of Asia emerging markets foreign exchange and rates strategy for Goldman Sachs.

He added that policy changes announced by Beijing earlier this month to allow more flexibility around the bond settlement cycle had helped shift the odds in favour of inclusion.

Signs of greater foreign participation in China’s onshore bond market comes alongside a broader financial opening-up, as the world’s biggest fund managers seek to expand their presence in the country following government reforms.

That has come despite escalating tensions between the US and China following the coronavirus outbreak and the introduction of a national security law in Hong Kong, with the Trump administration also demanding sale of the US operations of Chinese tech group ByteDance.

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