Bing Li, Head of China, Bloomberg L.P.
April 1st marked the beginning of a new dawn for China’s fixed income world – a $13 trillion debt market, and the world’s third largest after the U.S. and Japan.
In our view, China’s bond market is reaching a tipping point – as all four elements for an investable bond market – regulation, market access, investor demand and now benchmarks – are much more firmly in place.
Starting this April 2019, Chinese RMB-denominated government and policy bank securities were added to the Bloomberg Barclays Global Aggregate Index and phased in over a 20-month period. The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade from 24 local currency markets, so for investors worldwide, China’s inclusion is significant for a few reasons.
When fully accounted for in the Global Index, local currency Chinese bonds will be the fourth largest currency component (or approximately 6% of the index) following the US dollar, euro and Japanese yen. And since the introduction of the euro to the Global Aggregate Index, the China inclusion will be the biggest change to the index – which in itself speaks volumes about the potential implications. China’s debt market offers some of the best returns globally, yet foreign investors own just 2% of onshore bonds. For example, in 2018 the China Aggregate Index returned 3.54% while the US Aggregate Index returned 0.01%.
Over the past few months however, new data is confirming a growing domestic fund management industry and the entry of global investors. Bloomberg data shows that the volume of foreign investors purchasing policy bank bonds in the first two months this year is 60.8 billion yuan, almost six times the same period last year. Liquidity has also improved over the past year, and we are seeing greater activity in trades of government and policy bank bonds.
China’s index inclusion has been a journey
As financial reforms deepen and as its capital markets become more transparent to global investors. Bloomberg first brought up the topic of China’s bond market accessibility in the 2016 governance process. In 2017, we updated the inclusion rules for the China Aggregate Index (which also includes corporate bonds), and in March later that year, we launched four indices that included China. Last year, we were the first index provider to announce China’s inclusion into the global benchmark.
For inclusion in Bloomberg Barclays Aggregate Index, a local currency debt market must be classified as investment grade and its currency must be freely tradable, convertible, hedgeable, and free of capital controls. The completion of several planned operational enhancements by the People’s Bank of China, Ministry of Finance and State Taxation Administration, combined with China’s continued efforts to open up its bond market and active feedback from global investors, have resulted in RMB-denominated securities meeting these absolute index rules.
So how will the next chapter and story of China’s bond market unfold?
In our view, the plot will be determined by four main factors:
The China index inclusion is a clear vote of confidence for investors and arguably the biggest development in China’s bond market since its inception. We are thrilled to be leading investors through this pivotal moment and proud to be able to advance the Chinese bond market on the global stage. The next chapter of China’s bond market begins today, and we look forward to many more pages of developments to come.