As Chinese bonds are included in ever-more international indices, this could pave the way for hundreds of billions of dollars to flow into China’s bond market.
FTSE Russell recently launched a Chinese Green Bond Index Series; Chinese bonds will account for 5.49% of the $53.73 trillion Bloomberg Barclays Global Aggregate Index after Chinese securities are included in phases starting in April; and they may join the FTSE World Government Bond Index (WGBI), a widely used benchmark that includes sovereign debt from over 20 countries, as early as September.
“We are now consulting in considerable detail with all major global investors, to see if we can build a consensus whereby we can announce in September the inclusion of Chinese bonds [in WGBI],” said Mark Makepeace, chief executive of FTSE Russell, a global provider of indexes, benchmarks and data solutions, at the China Bond Market International Forum in Beijing in mid January.
“If we are not able to build that consensus by September, we will continue our work until we build that consensus. There is no doubt that Chinese bonds will be included in the global benchmarks, but we have to get a timing which will work for investors,” he added.
A Hong Kong Stock Exchange report last summer estimated that if Chinese bonds were to be included in the more widely used indices, foreign inflows into China’s bond market could triple to $100 billion to $400 billion.
The inclusion of Chinese bonds in global indexes like WGBI is positive for attracting passive fund flows into China’s bond market, agreed Gary Ng, a Hong Kong-based economist with French bank Natixis. Of course, the level of active funds’ inflows into China will depend on the appetite of global investors and China’s monetary conditions, he added.
Foreign investments account for only 2.3% of China’s more than $12 trillion bond market. That is less than the 11% and 12% that foreigners currently hold in the South Korean and Japanese bond markets respectively.
International investors can manage their portfolios passively by tracking an index or use the index as a benchmark to gain exposure to certain markets through financial products like exchange-traded funds (ETFs).
As a next step, the Chinese government is going to introduce ETF index products to facilitate foreign investment in Chinese bonds. "We have some thoughts about how to further open up the bond market," said Pan Gongsheng, deputy governor of the People’s Bank of China (PBOC).
The market is likely to react positively to such a move. According to FinanceAsia's Bond Connect survey in November last year, 11.6% of the foreign investors polled said that index inclusion would accelerate their entry into China's bond market.
CHINESE GREEN BOND INDEX
FTSE Russell has already announced the launch of the FTSE Chinese (Onshore CNY) Green Bond Index Series, which tracks Chinese green bonds. It will measure the performance of onshore yuan-denominated fixed-rate debt that is labelled “green” by the issuer. There are 126 bonds in the main index, which covers three-quarters of onshore green bonds issued by China’s government, agencies and corporations.
China is the second largest green bond market in the world after the US. It saw $47 billion issued in 2017, which represents 23% of green bonds issued globally, according to FTSE Russell's Makepeace.
The launch of this index - the first to be set up by an international index provider - should be positive for China’s bond market because it promotes Chinese green bonds and internationalizes the onshore bond market. More to the point, it could serve as a catalyst for investors who have not focused on the Chinese bond market previously.
Environment, social and governance (ESG) criteria are increasingly important for investors in screening potential investments. “We believe there should be significant fund flows into the onshore bond market. China’s green bond market is too big to be ignored and the Chinese government’s increased focus on ESG should support this trend,” said Nino Siu, a senior analyst and vice president at Moody’s.
A Hong Kong Monetary Authority (HKMA) spokesman agreed. “We expect that the launch of new indices tracking the mainland green bond market will raise international investors' interest and investment in the market. This will bring more business to Hong Kong, the preferred location for international investment in the mainland bond market,” he said.
The HKMA, the research bureau of PBOC and the Hong Kong Green Finance Association (HKGFA) co-organised a "Green Finance in Action" study tour in Hong Kong for more than 120 representatives of potential green bond issuers from mainland China in mid January to 15, with a view to facilitating their issuing green bonds in Hong Kong.
All the Chinese firms that participated in the event have indicated interest in green bond issuance in Hong Kong. Last year's issuance gives some reason to be hopeful. In the first three-quarters of last year, at least $8 billion of green bonds were issued in Hong Kong, of which $5 billion were by mainland Chinese issuers.
And with news that Hong Kong intends to issue its first sovereign green bond later this year, green shoots are certainly visible in this market.
