(Yicai Global) March 18 -- FTSE Russell is expected to join Bloomberg and J.P. Morgan in including Chinese government bonds in its flagship global index when the results of its semi-annual review are announced at the end of this month.

The global index compiler will announce the results of the review after markets close inEurope and the US on March 29 (about 6 a.m. on March 30 in China), a source at FTSE Russell told Yicai Global yesterday.

If the addition is confirmed, which depends onFTSE Russell’s assessment of practical improvements in China’s bond market,the sovereign notes would be added to the FTSE World Government Bond Index in October.The Bloomberg Barclays Global Aggregate Index and the JPMorgan Government Bond Index-Emerging Markets added them last year.

Their weighting in the FTSE WGBI will be 5.2 percent, according to BeckyLiu, head of China macro strategy at Standard Chartered Bank, further boosting foreign capital inflows into China’s bond market and giving additional support to the yuan exchange rate.

China’s bond market, already popular with overseas investors, will receive additional passive funds of USD130 billion to USD156 billion within a year of October’s addition, Liu predicted. That will also help raise the overall yield of the WGBI and shorten the duration of its bonds, she added.

Higher Returns

After Chinese government bonds are included, the WGBI’s mean yield will rise to 0.65 percent, and the average maturity will be shortened to 8.59 years from 8.77 years now, according to Standard Chartered. That is because Chinese debt offers an average yield of 3.09 percent, much higher than WGBI’s current 0.52 percent, and they have a shorter average duration of 5.31 years.

Though US yields are rising sharply, the spread between Chinese government bonds and US Treasuries has narrowed from an earlier high of 250 basis points to about 170 bips, analysts do not expect the pace of foreign capital inflows to slow.

“Because central banks in developed countries are still carrying out quantitative easing, Chinese bonds still have a substantial spread advantage, and their correlation with the international bond market is relatively low,” Liu said.

Yuan Boost

“In addition, once Chinese bonds are included in international indexes, the outlook for the yuan exchange rate will become more positive, so investors are unlikely to be underweight Chinese bonds,” she said.

If the notes are included in the WGBI, total foreign capital inflows are expected to reach CNY1.3 trillion to CNY1.5 trillion (USD200 billion to USD231 billion) this year, up from CNY1.06 trillion last year, according to Liu. Assuming 60 percent of that goes into Chinese sovereign debt, net buying of government bills by foreign investors may rise to CNY840 billion (USD129 billion) this year from CNY571 billion in 2020, she said.

By year’s end, foreign holdings of Chinese government bonds may rise from 9.1 percent at the end of last year to 11.5 percent or 12 percent. Overseas investors are likely to become the largest buyers after local commercial banks, Liu added.

Editor: Tom Litting