China’s massive bond market will be more accessible to foreign investors next year

SINGAPORE — Major index provider FTSE Russell said Thursday it will add Chinese government bonds to its flagship World Government Bond Index from October next year — a development that will bring billions of dollars of inflows into China.  

The inclusion — which will be China’s third entry into a major global bond index — comes at a time when investors are hunting for yield in an environment of ultra-low interest rates. Several investors estimated that at least $100 billion will flow into China after its bonds debut on the FTSE Russell index.

“I think this is another important landmark in China’s … internationalization of their domestic financial markets,” Ben Powell, BlackRock Investment Institute’s chief investment strategist for Asia Pacific, told CNBC’s “Street Signs Asia” on Friday.

He pointed out that 10-year Chinese government bonds are yielding around 3% which is “a very high number in the global context.”

China’s roughly $16 trillion bond market is the second largest globally, but is under-owned by international investors.

Pan Gongsheng, deputy governor of the People’s Bank of China and director of State Administration of Foreign Exchange, said in a statement that international investors held 2.8 trillion yuan ($410.69 billion) of Chinese bonds as at end August. That’s less than 3% of the entire Chinese bond market.

Joining the FTSE World Government Bond Index could further increase foreign investor participation in the Chinese bond market, which will also boost the yuan, according to Hong Kong-based CSOP Asset Management. The company said the Chinese yuan will be the fourth largest currency in the index, after the U.S. dollar, euro and Japanese yen.

FTSE Russell said it will confirm in March the exact date when Chinese government bonds will debut on its index. Before FTSE, Chinese government bonds had been added to the Bloomberg Barclays Global Aggregate Index and the J.P. Morgan Government Bond Index-Emerging Markets.

“Chinese authorities have implemented significant improvements to the fixed income market infrastructure to expand access to international investors,” FTSE Russell said in a statement announcing its decision on China.   

Those improvements include enhancing liquidity in the bond market, allowing additional choice of counterparties in foreign exchange trading, and better post-trade settlement processes, the company added.

— CNBC’s Eustance Huang contributed to this report.