HONG KONG -- Chinese sovereign bonds have won inclusion into FTSE Russell's flagship World Government Bond Index, potentially ushering a fresh global influx of funds into the world's second-largest debt market.
Chinese government bonds will be included in the index, which is tracked by $2.5 trillion in funds, starting October 2021, pending an affirmation early next year, the index compiler, owned by the London Stock Exchange Group, said in a statement late on Thursday. The inclusion will be phased into the index over a period of 12 months, it said.
HSBC Holdings estimates the inclusion will attract inflows of as much as $150 billion starting next year.
FTSE Russell is the last of the three main index compilers to add Chinese government debt, after Bloomberg Barclays and JPMorgan Chase made the move over the past year. Of the three, FTSE Russell has the largest group of passive investors.
The inclusion into the index comes at a time of worsening relations between Beijing and Washington. U.S. authorities are threatening to kick out Chinese companies from American stock exchanges and have called on federal pension funds to stay away from Chinese equities. President Donald Trump has raised the prospect of decoupling from the Chinese economy.
"The Chinese authorities have worked hard to enhance the infrastructure of their government bond market," Waqas Samad, the chief executive of FTSE Russell, said in a statement. "Subject to affirmation in March 2021, international investors will be able to access the second-largest bond market in the world through FTSE Russell's flagship WGBI."
FTSE Russell declined to include China's $16 trillion bond market last year, citing the need for market liquidity and increased flexibility in foreign-exchange execution and in the settlements. In April, it flagged that China had improved accessibility, liquidity and provided investors with greater currency trading options.
The People's Bank of China "will continue to work closely with industry participants to further enhance relevant regulations and to provide a more friendly, convenient investment environment for investors domestically and aboard," Pan Gongsheng, deputy governor of the central bank, said in the statement from FTSE Russell.
The inclusion of the bonds by index compilers has boosted global inflows by nearly 40% each year since 2017. Foreign investors held a record $383 billion Chinese government bonds at the end of June, or just 3% of the market, according to data from the PBOC.
Chinese government bonds have declined in value for the past five months, amid tighter liquidity and a flight to riskier assets. China's 10-year bonds currently yield 3.1%, compared with 0.67% for comparative U.S. debt. Yields move inversely to prices.
"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," said Candy Ho, global head of renminbi business development at HSBC. The FTSE inclusion "will further accelerate global investor participation."
In the same statement, the index compiler said Malaysia will continue to be included in the benchmark but will remain on the FTSE Russell Fixed Income watchlist for a potential downgrade.