Inclusion of Chinese Onshore Bonds in Global Indexes

The recent addition of Chinese Government Bonds (CGBs) and the bonds of three Chinese policy banks to a parallel version of the Bloomberg Barclays Global Aggregate Index included US$2.5 trillion in bonds, more than 5% of the index. CGBs would hold a similar weight in Citi’s World Government Bond Index (WGBI) upon inclusion.

J.P. Morgan includes approximately $573 billion of Chinese government bonds in its emerging markets local debt index family, though none of these bonds qualify for its investable benchmarks. If China were included today, it would constitute more than 35% of the GBI-EM uncapped index¹, though it would be capped at 10% of the more widely followed GBI-EM Global Diversified Index – the same weight as Mexico and Brazil. J.P. Morgan has had China on “Index Watch” for inclusion in the GBI-EM Global Diversified series since March 2016.

¹J.P. Morgan GBI-EM Global Diversified Index (GBI-EM) is an unmanaged total-return index tracking local currency denominated EM government debt.

In March 2017, Citi’s fixed income indexes decided to include onshore Chinese bonds (EMLC) (EMAG) (IGEM) (PCY) in its three government bond indexes—the Emerging Markets Government Bond Index, the Asian Government Bond Index, and the Asia Pacific Government Bond Index. In addition, Citigroup introduced two new indexes under its World Government Bond Index family—the Emerging Markets Government Bond Index-Capped and the Asian Government Bond Index-Capped. These indexes limit individual country exposure by imposing weights for each constituent. Chinese onshore bonds (EMLC) (VWOB) will be included in the new World Government Bond Index-Extended.

Similarly, Bloomberg launched two new hybrid fixed income indexes in March 2017 under the Bloomberg Barclays Benchmark Fixed Income Index family, which include Chinese onshore bonds (LEMB). As you can see in the above chart, China is likely to account for around 5.0% of the global index, representing the largest share of the emerging markets index.

The significant market reforms unleashed by China led to rising popularity of its bond market, which strengthens the case for inclusion in other dominant benchmark indexes. According to data from Haitong Securities, a Chinese brokerage firm, China has witnessed a 53.0% rise in inflows, amounting to ~ $155.0 billion from foreign investors in a year since it opened its market to non-Chinese investors. Over the next three years, China could see around $250.0 billion worth of investments in the bond market.