But the index compiler said investors wanted “improvements to secondary market liquidity, and increased flexibility in [foreign-exchange] execution and the settlement of transactions” before it upgraded China’s market accessibility rating, which determines index inclusion.
In recent years, China has opened up its main interbank bond market to overseas investors, and let foreign firms buy bonds through a Hong Kong trading link known as Bond Connect.
An upgrade by FTSE Russell would have led to Chinese debt joining its flagship FTSE World Government Bond Index—a benchmark for investment vehicles such as Franklin Templeton’s $33 billion Templeton Global Bond Fund. The next review will be in a year’s time.
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HSBC analysts have estimated such an inclusion would bring about $150 billion of inflows into China. They estimated the Bloomberg decision was likely to draw a similar amount of money, while JPMorgan’s could lead to roughly $20 billion of inflows.
China has been liberalizing its financial markets to help reduce strain on an overstretched banking system. The country’s leaders are also eager to turn the yuan into a global currency, in part by encouraging central banks to hold more yuan debt in their reserves.
Index inclusions have helped drive foreign interest in Chinese bonds, even as the trade war with the U.S. stretches into its second year and growth has slowed to its lowest in decades.
Foreign ownership of Chinese bonds topped 2 trillion yuan ($280 billion) in June, according to the People’s Bank of China, or about 2.2% of the overall market. International investors hold a higher proportion of government and policy-bank debt.
FTSE Russell, a unit of London Stock Exchange Group, began adding Chinese stocks to its equity benchmarks in June. The initial inclusion of shares is through a three-stage process that will be completed by March.