(Yicai Global) Sept. 2 -- Ahead of the release of FTSE Russell’s annual assessment of its World Government Bond Index, industry insiders believe the index compiler is very likely to add Chinese government bonds to the flagship benchmark, with the effect of lifting foreign holdings of the debt by 6 to 7 percentage points.

“We see an 80 percent chance that Chinese government bonds will be included in the WGBI,” said Liu Jie, head of strategy at Standard Chartered China.

In an interim assessment in April, FTSE Russell maintained its opinions from last September’s evaluation and kept China on the watchlist for possible inclusion in the WGBI. At the same time, FTSE Russell affirmed the country’s steps to improve accessibility and liquidity, which boosted the possibility of inclusion this time round.

Moves toward enhanced liquidity and foreign exchange flexibility in China’s financial markets should remove most obstacles in the way of an inclusion, Liu said.

FTSE Russell is due to publish the results of its latest appraisal on Sept. 24.

A bond trader with a foreign bank told Yicai Global that April’s assessment was a “positive sign that FTSE Russell is maintaining communication with the Chinese regulator, and it recognizes the improvement in liquidity in the Chinese bond market but wants to see more substantial improvement.

“So it is more likely to say ‘yes’ to the bonds being added,” he said.

The index weighting of yuan-denominated bonds is likely to be 5.7 percent, attracting USD140 billion to USD170 billion in passive inflows. Foreign investors may up their holdings by 6 to 7 percentage points from less than 10 percent now, Liu said, adding the figure could climb to 20 percent by the end of 2022.

Assets managed by institutions tracking the WGBI total between USD2.5 trillion and USD3 trillion, Standard Chartered estimates.

The bank expects foreign capital inflows into China to continue to accelerate in the coming quarters against the backdrop of a stronger yuan, interest rate differentials, continued diversification of global foreign exchange reserves and the inclusion of Chinese bonds into global indexes.

From January to July, capital inflow jumped 60 percent from a year earlier to CNY474 billion (USD69.5 billion). It is likely to reach CNY800 billion to CNY1 trillion (USD146.6 billion) this year, and will rise to between CNY1 trillion and CNY1.2 trillion next year.

Editors: Tang Shihua, Peter Thomas