Bloomberg LP announced it would admit China into its benchmark Bloomberg Barclays Global Aggregate Bond index, representing the latest avenue open to foreign investors wanting to tap into the third-largest bond market in the world.
Bloomberg will phase in the inclusion over a span of 20 months, starting from April 2019. Bloomberg said only bonds from Chinese policy banks and yuan-denominated government paper will come into their benchmark index. Their share would represent around 5.5% of the total index, or around $3 trillion, based on data from Jan. 31.
“China’s new position in international bond portfolios will pave the way for robust market activity and support continued financial reforms,” said Henry M. Paulson, former U.S. Treasury Secretary and now co-chair of The Working Group on U.S. RMB Trading and Clearing, in a statement.
The move means now foreign investors will now be able to participate in a largely untapped Chinese bond market, which is estimated to be as large as $11 trillion. Bloomberg is the first to include debt from the world’s second-largest economy into a major global benchmark index. At the moment, foreign investors hold around 2% of its onshore debt.
This follows after the country unveiled the Bond Connect last year, which allows outside investors to purchase Chinese bonds without prior approval from domestic financial regulators. In the past, money managers had to fly to Beijing to apply for a quota through the Qualified Foreign Institutional Investor Program.
Investors say China’s inclusion in widely followed bond-market indexes is following the preference for regulators to stagger access to its domestic financial markets. MSCI admitted Chinese domestic A-shares into its global stock market indexes after China launched its Shenzhen-Hong Kong stock index scheme.
“We’ve seen the liberalization and the access on the stocks side, we’re seeing a very similar path on the fixed income side,” said Brendan Ahern, chief investment officer at KraneShares, a provider of China-related exchange-traded funds.
But he added operational issues on the Bond Connect have prevented the channel from seeing wide adoption among foreign investors.
Nonetheless, investors have shown strong interest in China’s bond market. The stabilizing currency has given new luster to yuan-denominated bonds, which sport higher yields than equivalently rated government bonds in developed markets like Europe.
“Chinese government bonds offer some of the best value on the market right now and have seen a substantial yield lift through 2017,” wrote Hayden Briscoe, head of Asia Pacific Fixed Income at UBS Asset Management.