FTSE Russell WGBI officially included Chinese bonds to attract trillions of incremental funds to the market

Financial Associated Press (Shanghai, reporter Pantene) news, on October 29, FTSE Russell World Government Bond Index (WGBI) officially included in Chinese bonds, will promote trillions of incremental capital inflows into the onshore market. This is conducive to enriching corporate financing channels, promoting the downward trend of real interest rates, improving the style of financial markets, and strengthening risk awareness. In addition, it will also boost the flow of funds to professional investment institutions, attracting "long money" rather than "hot money".

The industry believes that the economic fundamentals of China's strong recovery make RMB bonds extremely cost-effective in the world, and the WGBI's recognition and endorsement of the opening up of China's bond market will further enhance the attractiveness of the RMB bond market; however, it also needs to be recognized that international floating capital often leads to financial risks, so the process of opening up is bound to be slow and orderly.

Boost the entry of trillions of scale funds

The head of the financial market department of Capital Bank (China) told the Financial Associated Press that the inclusion of Chinese bonds in the FTSE Russell WGBI index will continue to promote more capital inflows into the onshore market. Specifically, first, compared with similar bonds in the global composite index, China's onshore bonds have higher yields, the value of the renminbi is stable, and the interest rate differential between China and the United States treasury bonds is currently around 150 basis points.

Second, the correlation between RMB-denominated bonds and other markets is generally low, which helps international investors to diversify their investments; third, on a global scale, China's bond market is large, ranking second only to the US bond market, and the proportion of foreign investment is relatively low, and there is more room for growth in the future.

Wang Dan, chief economist of Hang Seng China, also said that today, China's stock market size exceeds 83 trillion yuan, and the bond market size exceeds 125 trillion yuan, ranking second in the world, second only to the United States. However, by the end of 2020, foreign capital only controlled 5.4% of the stock market and 2.8% of the bond market, and there was plenty of room for expansion.

In addition, compared with other emerging market government bonds, the safe-haven asset attribute of Chinese government bonds has gradually strengthened in recent years, and its main holders include mutual funds that track indexes; while the most important investment method of overseas asset management companies is to track indexes for passive allocation, so the inclusion of Chinese bonds in the FTSE Russell WGBI index will directly drive capital inflows.

Wang Dan pointed out that so far, the world's three mainstream fixed income benchmark indexes and major stock indexes have been included in Chinese securities, and china's weight has been gradually increased. According to the total capital of these indices and the latest China weight estimates, after inclusion in the index, the us dollar funds passively brought into China's bond market will exceed 3.4 trillion yuan, and the US dollar funds brought into China's stock market will exceed 800 billion.

In view of whether the inclusion of Chinese bonds in the FTSE Russell WGBI Index indirectly affects the stock market, the head of the financial market department told the Financial Associated Press that it should have little to do with the stock market, but may provide foreign funds with more diversified investment channels in addition to the Chinese stock market, thus increasing the attractiveness of investing in China's capital market.

The US-China spread is expected to remain high

Many market participants believe that after the outbreak of the epidemic, under the condition that the interest rates of long-term bonds in major overseas economies are basically stable, the interest rates of Chinese treasury bonds have risen rapidly, and the interest rate differential between China and the United States 10-year treasury bonds has been at a high level for a long time, and such interest rates and interest rate differentials have a high attractiveness for foreign investors.

FTSE Russell analysts pointed out that the reasons for the fact that the yield of Chinese government bonds is much higher than that of the Group of Seven include the following points, first of all, the different developments in the monetary, economic and financial systems of the two, as well as China's low exposure to the global financial cycle.

Second, for much of since 2008, the G7 and central banks have adopted a zero-interest-rate policy to implement quantitative easing asset purchase programs; by contrast, China's policy rate has never fallen below 3.85 percent since 2000. And Chinese banks continue to hold lower exposure to global assets.

In addition, foreign investors' access to China's domestic government bond market and RMB convertibility have also been restricted, resulting in foreign investors holding Chinese government bonds at a much lower rate than other major bond markets, accounting for only 10.9%, once again reducing the correlation with G7 bond yields.

Overall, the high interest rate differential between China and the United States is one of the important reasons for the influx of foreign capital. Looking ahead, Wang Dan pointed out that in order to give the economy a bottom, the Fed will keep interest rates low for a long time, and China's prudent monetary policy means that there is not much room for a sharp interest rate cut, so this spread may continue.

The two-way opening of capital ushered in a window period

"After the epidemic, the momentum of capital inflows into China is very strong, and it is in the window period of promoting the two-way opening of capital." Wang Dan said that investors need to have more investment channels, coupled with the intensive introduction of policies such as "debt southbound connection" and "cross-border wealth management", which is conducive to promoting the two-way flow of capital.

Wang Dan pointed out that the inclusion of Chinese bonds in the FTSE Russell Index WGBI is conducive to enriching the financing channels of Chinese enterprises and developing direct financing, and financing facilitation will further drive the expansion of China's advantageous industrial chain; secondly, the influx of foreign capital will bring incremental funds, which will help promote the downward trend of real interest rates and enhance the valuation of the stock market; in addition, improve the style of China's financial market and promote Chinese financial institutions to strengthen risk awareness; in addition, it will also accelerate the process of domestic de-retail investors, boost the flow of funds to professional investment institutions, and attract "long money." Not "hot money."

She also pointed out that the process of opening up must be slow and orderly, because international floating capital often triggers financial risks, which often have uncontrollable consequences for the exchange rate and currency stability of developing countries.