FTSE Russell will not include China in its flagship government bond index, citing market liquidity and foreign exchange concerns in the country’s $5tn government debt market.
The index provider, which released the results of its annual fixed income country classification review on Thursday in New York, said measures taken by Beijing to improve foreign investor access to its government bonds “mark significant progress” towards China achieving inclusion in FTSE Russell’s flagship World Government Bond index.
But it noted that index users “have provided feedback that they would like to observe further improvements to secondary market liquidity, and increased flexibility in [foreign exchange] execution and the settlement of transactions”.
The move comes despite China making gradual reforms to allow greater market access and the inclusion this year of Chinese government bonds in the rival Bloomberg Barclays Global Aggregate index, the first such move by a major index provider. This month, the London Stock Exchange Group, which owns FTSE Russell, was subject to an unsolicited takeover bid from Hong Kong Exchanges and Clearing, whose largest shareholder is the Hong Kong government.
That move could spur foreign capital flows into Chinese government debt of $150bn by 2021, according to S&P Global Ratings. Earlier this month, JPMorgan Chase also announced Chinese bonds would be included in its emerging market government bond indices.
“It’s a bit of a surprise that [China] wasn’t included [in FTSE Russell’s WGB index],” said Paul Sandhu, head of Asia-Pacific multi-asset quant solutions and client advisory for BNP Paribas Asset Management. “The market trend is inclusion and people see that China is a significant part of the global market — it moves markets whether you’re invested in it or not.”
A graphic with no description Analysts at Citigroup have estimated that China’s inclusion in the WGB index could spur passive inflows of about $120bn into the country’s government debt.
Foreign investors, while welcoming recent reforms, frequently point to persistent uncertainties when it comes to investing in onshore Chinese government debt.