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31 July


Global investors aim to buy Chinese bonds, despite the trade war

Bloomberg will put them in your key index

Photo: Nikkei

/NOVOSTIVL/ Global investors are reconsidering their asset allocation in favor of picking up Chinese bonds after the announcement of their inclusion in a key Bloomberg index, even though the economy is slowing down amid escalating trade tensions with the U.S. This article appeared in the Nikkei Asian Review.

"Foreign investors were almost completely absent a decade ago," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings in his report. Foreign investors "now hold about 2% of the bonds outstanding. This is still low by major bond market standards, but we believe we have reached an inflection point," he added.

The reason for this is because Chinese government and policy bank bonds are being added to the Bloomberg Barclays Global Aggregate Index, which is tracked by over $2 trillion of assets. The bonds will be added to the index over a 20-month period.

Once the bonds have been added completely, China's weighting in the index will jump to nearly 6%. Bloomberg said that will make China's local currency bonds the fourth largest currency component after the U.S. dollar, euro and Japanese yen.

Roache pointed out that this "would imply inflows of $150 billion" and that other index publishers, such as FTSE Russell's World Bond Index, could also be prompted to jump on the bandwagon to include Chinese bonds.

According to data from credit rating agency Moody's Investors Services, the total yuan bonds held by foreign institutional investors at the end of January was $262 billion, an increase of more than 50% compared with a little over a year ago.

"China's policymakers will have to adapt to this new reality," said Roache. S&P raised two options for policy change including a more flexible exchange rate. "Our opinion is that financial stability in China (and also the rest of the world) would be best served by letting the exchange rate act as the key capital flow shock absorber."