China’s onshore bond market is open for business

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Historically, investors outside of China have struggled to access the country’s full range of unique investment opportunities. But that story is changing as policymakers seek to liberalize Chinese stock and bond markets to allow better access to Chinese onshore investment.

With $ 17.5 trillion in assets, China is the world’s second largest bond market and offers unique and distinct portfolio attributes. [Source: Source: WIND, as of December 2020.] Although various reforms such as the introduction of Bond Connect have simplified access to China’s onshore bond markets, supporting more than $ 500 billion of foreign capital in the market – more than half of which has been raised since 2019, [Source: Bloomberg and JP Morgan index inclusion have completed as of end 2020, with FTSE WGBI inclusion planned to commence in October 2021. Estimated inflows from three indices respectively are US$150bn, US$30bn and US$150bn respectively.] foreign investment is only 3%. As Chinese markets continue to open, market participants expect increasing levels of foreign investment, benchmark inclusion and marketability. Institutional portfolios must take into account the impact this development will have on their portfolio profile, returns and monitoring implications.

Given the attractive portfolio attributes offered by the market, coupled with China’s emphasis on the quality of its economic growth trajectory, pension plans should consider how Chinese bond allocations can meet their financial needs. long-term financing and diversification at the dawn of the next decade.

A unique opportunity?

Total returns on Chinese bonds offer attractive diversification benefits given their low correlation with other bonds in developed markets. When bond markets around the world were rocked by the onset of the Covid-19 pandemic, Chinese bonds were relatively stable. The asset class also offers higher yields than developed market debt, a topic of considerable importance given the global scarcity of yields that has existed for many years. Today, half of all bonds that earn 2.5% or more – both government and credit – are in China.

Inclusion of the FTSE World Government Bond Index (WGBI) confirms China’s arrival on the global bond scene

In March 2021, FTSE Russell announced that Chinese government bonds would be included in its flagship FTSE World Government Bond Index (WGBI) and derivative indices. Inclusion must take place over a 36-month period from October 29, 2021 (i.e. November 2021 to October 2024). The projected weight of China in the WGBI index is around 5.71% based on the index profile of August 2021. This confirmation is based on the assertion with the members of the advisory committees of FTSE Russell and other users of evidence that the ongoing reforms of the Chinese government bond market warrant their inclusion in the WGBI.

Since the announcement of the September 2020 Fixed Income Country Classification results, FTSE Russell has engaged in close collaboration with Chinese authorities and market participants to monitor previously implemented market improvements and recent reforms. in order to facilitate the participation of international investors. These include the simplification of the account opening process, the ability to conduct foreign exchange transactions with third parties and the freedom to extend the settlement cycle beyond T + 3.

Zhanying Li, Senior Director, Data & Analytics Product Sales Manager, APAC, FTSE Russell: “Foreign ownership of Chinese governments continues its upward trend, exceeding 11% at the end of July 2021. In fact, the net inflow into the Chinese government bond market by foreign investors for the seven first months of 2021 is 81% total net emissions over the same period. ”

For more information on including Chinese bonds in the FTSE WGBI, please download our research here

ETFs play a crucial role in accessing Chinese bonds

Many bond portfolios remain heavily underweight China, with average allocations of just 0.05%. [Source: Portfolio average allocation figures based on BPAS EMEA client portfolios gathered between 31 Dec 2019 and 31 Dec 2020.] This active underweighting could have significant and unforeseen implications for return, returns and tracking, and pension plans must increasingly focus on what this means for their portfolios.

As Chinese markets open up to foreign investors, the operational complexities of setting up direct trade and access have proven to be a long and resource-intensive process. Pension schemes in the UK are finding that the time and resources required to do business and settle ashore are high. Europe-domiciled, European-listed ETFs that trade in local time zones offer investors a significantly more streamlined path to obtaining desired exposure. Global asset managers with local expertise who can deliver efficient products and operations play a key role for the investment industry.

IShares’ China Bond ETF suite has seen an accelerated adoption rate, with total assets exceeding $ 13 billion since the launch of the first funds in 2019. Secondary market trading and liquidity have also improved significantly. The ability to trade by size, low cost and in real time has spurred the growth and adoption of Chinese bond ETFs for efficient market access. [Source: BlackRock, as of 31/08/21]

In short – a must-see market.

Although the numbers remain low relative to the size of the country’s market, Chinese bonds are a growing component of global bond indices – investors will no longer be able to ignore them any longer. The diversification and return benefits are particularly attractive, and while geopolitical risks exist, this growing and increasingly quality market is an allocation we believe institutional investors will focus more on in the future.

This document is not intended to be construed as forecasting, research or investment advice, and does not constitute a recommendation, offer or solicitation to buy or sell any securities or financial products or to adopt any investment strategy. ‘investment.

You can contact Justin Wheeler at the following address

[email protected]

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