World is not ready for China's entry to global bond indices

Inclusion of China's bonds set to boost financial integration | #AsiaNewsNetwork
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Inclusion of China's bonds set to boost financial integration | #AsiaNewsNetwork Latest Issues

Foreign investors only own 3.4% of Chinese bonds, lower than the 30% for the USA bond market due to historically limited access to the Chinese bond market.

Moody's forecasts that a full inclusion could potentially lead to an inflow of about 2 trillion dollars of funds.

By then, China is estimated to have a weighting of approximately 6.06 percent in the index, and the yuan will be the fourth largest currency component, after the dollar, the euro and the Japanese yen.

The value of bonds issued in China totaled 2.4 trillion yuan (about 357 billion USA dollars) in February, the central bank said Monday.

Overseas holdings of yuan-denominated onshore bonds have totaled more than 1.7 trillion yuan in recent months, accounting for around 2% of these bonds, according to data from the central bank.

The estimates of the analysts estimated that the inclusion of the bonds will attract more or less $150 billion of foreign inflows to China's $13 trillion bond market.

China stepped up efforts a year ago in preventing abnormal financial volatility and properly handling local government debt risks.

The inclusion is an "important milestone" in China's financial integration into the world economy, said Changyong Rhee, director of the IMF's Asia and Pacific Department, at a book forum held in Washington D.C.in March. The Chinese government also launched connect programs to allow investors to purchase certain shares and bonds through the stock market in Hong Kong.

Schipke noted that the inclusion of the renminbi (RMB) in the Special Drawing Rights (SDR) basket in November 2016 was associated with operational improvements in China's bond market, which has triggered a surge in global investor interest.

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Citing the "co-movement" of the RMB with other currencies in the world, Schipke said the worldwide monetary system might be moving away from the bipolar USA dollar and the euro blocs to a tripolar system.

"Global benchmark indexes finally incorporating some of China's vast bond market is a significant milestone", said Arjun Vij, a portfolio manager at JPMorgan Asset Management, said in the statement. One of the solutions is to set up a well-built market-maker system to provide sufficient liquidity.

The Bloomberg Barclays Global Aggregate Index began a phased addition of Chinese securities on April 1. And now for the first time, onshore China bonds are officially in a major global bond index.

Over the next two years, hundreds of government and policy bonds will be included into the index.

Reports said that there are 159 Chinese government bonds to be added on the index.

Some institutional investors have pointed out that although market making has been widely implemented internationally, it isn't well-developed in China. The team suggested that China strengthen the capacity of financial regulators, boost foreign participation and improve communication, among other things. "We expect this to accelerate onshore bond market development to become more matured and sophisticated like other developed markets", added Ng.

"Last year China celebrated its 40th anniversary of reform and opening-up, which contributed to China's trade and product integration", said Schipke.

Investors in the United States have confidence in the Chinese financial market, he said.

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