The inclusion of Chinese government bonds in the FTSE Russell WGBI is expected to attract trillions of dollars in China's bond market from today

Source: Shanghai Securities News

On October 29, the FTSE Russell World Government Bond Index (WGBI) was officially included in The Chinese Bond Index. Industry insiders estimate that with this as a new starting point, China's bond market is expected to usher in trillions of dollars of funds.

The interviewed experts said that the current proportion of foreign capital in China's bond market still has a large room for improvement, and moreover, RMB bonds have both investment value and income stability, and the steady allocation of RMB bonds by foreign capital is a medium- and long-term trend.

China's bond market will once again welcome "living water"

At the end of March this year, FTSE Russell confirmed in an announcement on its official website that the Inclusion of Chinese Treasury Bonds in the WGBI will be included in phases within 36 months, with a weight of 5.25%, effective from October 29 this year.

A number of institutional sources said that this landmark event will drive both active and passive funds into the Chinese bond market, which is expected to attract trillions of dollars of funds to China's bond market.

Liu Jie, head of China macro strategy at Standard Chartered Bank, expects Chinese treasuries to receive passive inflows of $130 billion to $156 billion after being included in the FTSE Russell WGBI Index.

Before the "effective date" came, funds were already being "deployed" in advance. According to the China Bond Information Network, on October 19, as much as 12.7 billion yuan of overseas funds bought Chinese bonds. Joe Perry, a senior analyst at Jia sheng Group, said it was possible that international investors were buying Chinese bonds in advance.

"The inclusion of Chinese bonds in the FTSE Russell WGBI index will continue to drive more capital inflows into onshore markets." Zhong Haidan, senior account investment manager of Invesco, said that on the one hand, China's onshore bonds have higher yields compared with similar bonds in the global composite index; on the other hand, rmb-denominated bonds are generally less correlated with other markets, which helps international investors diversify their investments.

The allocation of RMB bonds by foreign capital is a medium- and long-term trend

The gradual enhancement of the internationalization level of RMB bonds means that their linkage with the global financial market will also be further strengthened. Recently, a major concern in the market is that with the gradual normalization of monetary policy in major economies around the world and the "tide" of liquidity gradually receding, will the enthusiasm of foreign funds for Chinese bonds continue?

A number of experts said that from the perspective of global investors, benefiting from the characteristics of higher yields and diversification, foreign capital will continue to flow into China's bond market.

"The steady allocation of RMB bonds by foreign capital is still a medium- and long-term trend." Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesman, said at a press conference on foreign exchange revenue and expenditure data in the first three quarters a few days ago that China's bond market is relatively large, and the proportion of foreign capital is relatively low, and there is a large room for growth in the future. Moreover, the yield of domestic bonds is relatively high, the value of the renminbi is stable, and the Chinese bond market has a good investment value.

Since the beginning of this year, with the changes in the external environment, the allocation scale of RMB assets by foreign investors has fluctuated slightly, but the trend of increasing holdings is clear. According to data from the Central Clearing and Settlement Corporation, the pace of foreign investment holdings has accelerated significantly, and as of the end of September, the denomination of overseas institutional bond custody reached 3,494.1 billion yuan, an increase of 88.4 billion yuan from the end of August.

Wang Chunying said that since the third quarter, although foreign debt purchases have fallen back from the high level in the first half of the year, they still increased by 7% compared with the same period in 2019. In anticipation of the gradual recovery of the global economy and the shift in monetary policy of major countries, foreign bond purchases have maintained a certain scale and returned to the normal situation before the outbreak of the epidemic, which is a normal performance.

Market institutions estimate that Chinese assets will account for 5% to 10% of the world's three major indexes, ranking first among the assets of emerging economies included.

The preferential tax policy was extended to the end of the 14th Five-Year Plan

The market has another piece of good news. The executive meeting of the State Council held on October 27 decided to extend the implementation period of the exemption of corporate income tax and value-added tax on bond interest income obtained by foreign institutional investors investing in the domestic bond market to the end of the 14th Five-Year Plan, that is, 31 December 2025.

Zhang Jinqiu, vice president and co-director of capital markets and securities services at HSBC Bank (China) Limited, said that in recent communications with foreign investors, they have noticed that they are generally concerned about the continuation of the tax exemption policy that was due in November this year.

Now that the policy has been settled, the market is full of warm emotions. "The extension of the tax incentives to the end of 2025 conveys China's firm determination to continue to open up its financial markets to the outside world, and helps attract more foreign investors to invest in the domestic bond market." Zhang Jinqiu said.

Wang Dan, chief economist of Hang Seng China, said the extension of tax incentives will help stabilize foreign investment expectations and enhance the attractiveness of China's bond market. At the same time, more foreign capital entering China's financial market is also conducive to the RMB to better go global.

Reporter Fan Zimeng Editor Chen Yu