Game changer: China’s yuan bonds to reshape global capital markets

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Yuan-denominated Chinese bonds were included in the Bloomberg Barclays Global Aggregate index on Monday. The move is expected to attract trillions in foreign inflows into China and the reshaping of global capital markets.

Over the next 20 months, the index will add 364 bonds issued by the Chinese government and the so-called “policy banks” (lenders set up to support the government’s development plans and policies).

Analysts estimate the full inclusion will attract around US$150 billion of foreign inflows into China’s bond market, which is the third-largest in the world after the US and Japan.




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“Today marks an important milestone as China’s capital markets continue to find their place in the global investment mainstream,” said Justin Chan, HSBC’s co-head of global markets in Asia Pacific.

China’s weight in the index will increase to around six percent and the Chinese yuan will become the fourth-largest currency component, Bloomberg estimates.

“Purely from the weight of money and the shift in global capital markets, this is the biggest change in global capital markets that we have seen for some time, and we believe it is something that all investors should be paying attention to,” Hayden Briscoe, Asia-Pacific head of fixed income at UBS Asset Management, was cited as saying by the Financial Times.

Experts note that despite the Chinese bond market’s large size, the bonds are under-owned by global investors. Foreign holding of Chinese debt stands at only two percent of the $13 trillion in total value, they say.

According to Khoon Goh, head of Asia research at ANZ bank, Chinese central government bonds have the highest foreign ownership at close to eight percent. That’s still“very low” compared to 35 percent for US Treasuries and 28 percent for British government debt.

Meanwhile, several other key index providers (including the JPMorgan Government Bond Index-Emerging Markets and the FTSE World Government Bond Index) are also considering whether to add Chinese bonds in their benchmarks.

Goh estimates China would receive as much as $275 billion in foreign inflows as a result of its bonds being added to indexes by Bloomberg, JPMorgan, and FTSE. That would help increase the Chinese yuan’s share in foreign currency reserves held by central banks globally.

“Given the structural increase in foreign portfolio inflows over the next few years, we expect the yuan to stay supported,” Goh said.

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