FTSE Russell to Include Chinese Govt Bonds in Global Index

FTSE Russell cites “significant improvements” to expand access to international investors, improve liquidity, and develop settlement and custody processes. 

FTSE Russell has announced that it will start including Chinese government bonds in the FTSE World Government Bond Index (WGBI) starting in October 2021.

According to the index compiler, the move reflects ongoing progress by China toward market reforms and increased access for global investors. Since 2018, Chinese authorities have implemented significant improvements to the fixed income market infrastructure, FTSE Russell said, citing measures that:

• improved secondary market bond liquidity through significantly more re-openings of existing bonds and ensuring new issues are larger
• encouraged more market making services to foreign investors
• taken steps to increase participation in the development of a treasury futures market
• provided greater access to European based participants by extending bond trading hours to 20:00 Beijing time from 21 September 2020
• enhanced the FX market structure by introducing regulation that allows investors to trade spot and forward FX with third parties for currency conversion and FX hedging purposes under both CIBM Direct and Bond Connect
• allowed foreign investors to choose a settlement cycle beyond T+3, as agreed between counterparties, without the need for submitting an application and, in the case of failed settlements, permitting three additional days to resettle the trades with the original trade terms

The commencement date is subject to final affirmation in March 2021 from members of the FTSE Russell advisory committees and other index users that the reforms have resulted in practical market structure improvements.

Specifically, the following areas will be in focus:

• the account opening process, including the ability to register at the legal entity level
• the ability to transact FX with third parties.
• the changes to the settlement process to allow settlement beyond T+3

“FTSE Russell has announced an inclusion timetable for Chinese government bonds in its flagship WGBI index,” said PBOC (People’s Bank of China) deputy governor Pan Gongsheng. “This is very much welcomed by the PBOC.”

“PBOC 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.”

Chinese bonds have already been included in the Bloomberg Barclays Global Aggregate Index (BGAI) and JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM).

According to Goldman Sachs, the FTSE Russell inclusion will attract about USD 140 billion in inflows over the 12-month phase-in period.

China’s bond market is worth roughly USD 16 trillion and is the second largest globally, though international investors hold less than 3 percent.

The 10-year Chinese government bond is yielding around 3 percent, which is considered high compared to other markets.