Foreign inflows into Chinese bonds set to quicken after FTSE index inclusion

Foreign inflows into Chinese bonds are set to gather steam as global index provider FTSE Russell has chosen to include Chinese government bonds in its flagship bond index, adding fuel to mounting enthusiasm in the world's second-largest bond market.

The index compiler on Monday confirmed that Chinese government bonds will be included in the FTSE World Government Bond Index (WGBI) at the end of October in phases over a period of 36 months to ensure an orderly transition.

Based on March 25 prices, Chinese government bonds would comprise 5.25 percent of the WGBI on a market value-weighted basis when fully included.

The FTSE is the last of the three major global index providers to include China's government bonds, following their gradual entries into the Bloomberg Barclays Global Aggregate Index from April 2019 and the Government Bond Index Emerging Markets suite of JPMorgan from February 2020.

The latest inclusion will, on average, spur net monthly foreign inflows ranging from 3.6 billion U.S. dollars to 4.2 billion U.S. dollars into China's government bond market, according to analysts.

Foreign interest in China's bond market has been running high since 2020, fueled by a faster-than-expected economic recovery, the wide spread of Chinese 10-year government bonds over their U.S. counterparts, as well as a firming yuan.

Overseas investors held a total of 3.15 trillion yuan (about 479.4 billion U.S. dollars) in Chinese bonds by the end of February, rising 3.13 percent from a month earlier and marking the 27th consecutive month of growth, data from China Central Depository & Clearing Co. Ltd. shows.

Although the yield of 10-year U.S. government bonds has gradually ticked up and the yuan's exchange rate against the U.S. dollar has stabilized, analysts expect the rush to buy into China's bond market to extend well into 2021 as the share of Chinese bonds in global asset allocation remains low.

China is the world's second-largest bond market, but overseas investors' Chinese bond holdings are relatively low compared to the share of Chinese bonds in the global market, according to Li Zhanying, Asia Pacific ex-Japan head of product sales and relationship management at FTSE Russell.

While high yields are a major consideration for investment, including Chinese bonds in portfolios will help investors diversify risks due to their relatively loose correlations with other bond markets, according to Li.

Increasing participation by overseas investors comes amid the country's steady reforms to facilitate easier access to its market, including the simplification of the account-opening process and the option of foreign exchange transactions with third parties.

"With the steady progress of financial reforms and the opening of the market, RMB assets are showing strong resilience and certain hedging characteristics, and their attractiveness continues to rise," noted Pan Gongsheng, deputy governor of the People's Bank of China.

Going forward, China will continue to work to actively improve relevant regulations and policy arrangements and promote the further opening of China's bond market to international investors, he said.