21st Century Business Herald reporter Chen Zhi reported from Shanghai
China's bond market is open to the outside world as "another city".
On October 29, the FTSE Russell World Government Bond Index (WGBI) was officially included in The Chinese Bond Index.
Liu Jie, Head of Macro Strategy at Standard Chartered China, said that according to the plan, the FTSE Russell WGBI Index will be gradually included in China's national bonds in the next 36 months, and the entire inclusion period will attract passive capital inflows of 100 billion to 130 billion US dollars.
"On October 29, many investment institutions that followed the WGBI index to passively allocate global bonds have increased their positions in Chinese government bonds." A bond trader at a Hong Kong bank told reporters. Although the WGBI index plans to increase the inclusion of Chinese government bonds to 5.25% after 36 months, some overseas investment institutions have decided to overprovision in advance – directly taking out 2%-3% of the bond portfolio funds to invest in Chinese government bonds.
"Behind this, on the one hand, the yield of Chinese government bonds is higher than that of the WGBI index, and the early over-allocation strategy can create excess yields to outperform the performance benchmark, on the other hand, many overseas investment institutions hope to expand the degree of diversification by allocating Chinese government bonds, and create more stable returns with the help of the lower correlation between Chinese government bonds and global bonds." He analyzed.
It is worth noting that more than 100 billion US dollars of funds have followed the WGBI index into Chinese government bonds, which has invisibly boosted the balanced valuation of the RMB exchange rate.
The reporter learned from many sources that many overseas investment institutions that follow the WGBI index did not take corresponding exchange rate risk hedging operations while increasing their positions in Chinese treasury bonds. Because they believe that such a large inflow of funds is making the FUTURE RMB exchange rate easy to rise and fall.
According to the data, as of 19:00 on October 29, the onshore RMB exchange rate hovered around 6.3966 against the US dollar, a slight decline of 48 basis points from the previous trading day, and the offshore RMB exchange rate against the US dollar touched 6.3901, a slight decline of 37 basis points from the previous trading day.
"The overseas RMB exchange rate continues to be higher than the domestic RMB exchange rate, indicating that overseas investment institutions are more confident in the steady appreciation of the RMB in the future." A Hong Kong bank forex trader pointed out.
Wang Chunying, deputy director of safe management bureau, previously said that the relatively high yield of chinese bonds onshore and the fluctuation of the RMB exchange rate are quite stable, which are specific manifestations of the investment value of Chinese government bonds.
The People's Bank of China pointed out that FTSE Russell officially included Chinese government bonds in the FTSE World Treasury Bond Index (WGBI), which fully reflects the confidence of international investors in the long-term healthy development of China's economy and the continuous expansion of financial opening up. In the future, minsheng Bank of Chinese will continue to work with all parties to actively improve various policies and systems, consolidate and expand two-way cross-border investment and financing channels, and provide a more friendly and convenient investment environment for domestic and foreign investors.
<h4>Why overseas investment institutions "over-allocate in advance"</h4>
Compared to the Bloomberg Barclays Global Aggregate Index (BBGA) and the J.P. Morgan Global Emerging Markets Government Bond Index (GBI-EM), the FTSE Russell World Government Bond Index (WGBI) appears to have been incorporating Chinese treasuries longer, at 36 months.
In the view of many industry insiders, this is mainly based on the consideration of smoothing the progress of overseas funds obtaining Chinese treasury bonds and alleviating the fluctuations caused by the inclusion process to Chinese treasury bonds.
"In fact, the inflow of Chinese government bonds generated by the FTSE Russell World Government Bond Index (WGBI) is by no means low." The above-mentioned Hong Kong bank bond trader revealed to reporters.
CICC previously issued a report pointing out that if the funds tracked by the FTSE Russell World Government Bond Index (WGBI) passive investment in global bonds are as high as $3 trillion to $5 trillion, the 5.25% inclusion ratio corresponds to the inflow of Chinese government bonds as high as $150 billion to $260 billion, and the average monthly inclusion of funds reaches $4.2 billion to 7.2 billion.
The reporter learned from many sources that in the face of the relatively long inclusion process of the FTSE Russell World Government Bond Index, many overseas investment institutions simply chose the "early over-allocation" strategy. On the 29th, many overseas investment institutions that followed the passive investment of the WGBI Index directly used 2%-3% of the funds to invest in Chinese government bonds.
The reason for this is that they see the over-allocation of Chinese government bonds as an important strategy to outperform the performance benchmark of the WGBI index. At present, the yield of Chinese government bonds has reached about 3%, which is higher than the performance benchmark of the WGBI index, which can undoubtedly bring considerable excess returns.
A person in charge of an offshore bond enhancement fund that follows the WGBI index to passively invest in global bonds told reporters that another consideration for many overseas investment institutions to overproduce Chinese government bonds in advance is to diversify investment risks. After all. The correlation between Chinese treasury bonds and global bond volatility is relatively low, and in the case that the Fed's reduction of QE may trigger abnormal fluctuations in the global bond market, early over-allocation of Chinese government bonds may create a higher investment safety cushion effect.
"In addition, we agree internally that the current allocation of Chinese government bonds is low." He confessed. At present, the prospects for China's economic fundamental growth are higher than those of many emerging market countries, but in his portfolio of foreign institutional bonds, the proportion of Chinese treasury bond investment is far lower than that of emerging market bonds such as Brazil, India and Indonesia, making the entire bond allocation structure "incompatible" with the current global economic development trend.
"Therefore, we take advantage of the opportunity of the WGBI index to officially include Chinese treasury bonds, and first increase the proportion of Chinese treasury bond investment from 2.5% to 3% through the QFII channel, and then continue to increase the position according to the inclusion process of the WGBI index in the future." The head of the offshore bond enhancement fund pointed out.
Wang Chunying, deputy director of SAFE, previously said that with the continuous opening up of China's bond market, the recognition of Chinese bonds by international investors is continuing to increase. According to market estimates, Chinese assets will account for 5%-10% of the three major global bond indexes, ranking first among the emerging market countries included. In the future, with the further steady development of the domestic bond market, the continuous enrichment of various types of bond products, and the continuous integration of relevant legal systems with the international market, it is expected to attract more passive and active allocation funds inflows.
<h4>Boost the long-term steady appreciation of the RMB exchange rate</h4>
It is worth noting that more than US$100 billion of foreign funds have followed the WGBI index into China's treasury bond market, making the financial market more confident that the RMB exchange rate will continue to appreciate.
"After the WGBI index was officially included in China's treasury bonds, some hedge funds have raised the equilibrium exchange rate of the renminbi against the dollar in the middle of next year to 6.35-6.38, up more than 300 basis points from their previous expectations." The above-mentioned Foreign exchange trader of a Hong Kong bank pointed out to reporters. Last week, the RMB exchange rate appreciated rapidly, and there was also a "credit" for the inclusion of Chinese government bonds in the WGBI index - at that time, many overseas hedge funds expected that a large number of overseas funds would follow the WGBI index to over-allocate Chinese government bonds, and buy the RMB exchange rate in advance to make a profit.
"Now they have adopted a strategy of buying expectations and throwing away facts, and with the official inclusion of Chinese government bonds in the WGBI index on the 29th, they have begun to take profits, which has caused the RMB exchange rate to fall slightly on the same day." He analyzed. However, if foreign funds following the WGBI index continue to flow heavily into Chinese government bonds in the future, these hedge funds will still make a comeback to continue to chase up the yuan exchange rate arbitrage.
The head of the aforementioned overseas bond enhancement fund that passively invests in global bonds with the WGBI index pointed out to reporters that although hedge funds have recently borrowed the WGBI index to include Chinese treasury bonds to speculate on the rise of the RMB exchange rate, they did not take corresponding exchange rate risk hedging measures when they increased their positions in Chinese treasury bonds on the 29th.
"In fact, we also believe that as more than $100 billion of foreign funds follow the WGBI index into Chinese government bonds, the RMB exchange rate will show a steady appreciation trend in the future, and we do not need to sacrifice part of the investment income for exchange rate risk hedging." He said bluntly. At present, the exchange rate risk hedging tools in the foreign exchange market are quite abundant, and once the RMB exchange rate fluctuates abnormally sharply, they can also quickly buy corresponding foreign exchange derivatives to carry out risk hedging.
In his view, another important reason why many overseas investment institutions that follow the WGBI index to increase their positions in Chinese treasury bonds are reluctant to take exchange rate risk hedging operations is to maximize the returns of Chinese treasury bond investments.
"We have calculated internally that if we want to hedge exchange rate risk, we will have to sacrifice about 40-50 basis points of return on Chinese government bond investment. Sometimes, the 40-50 basis point yield difference determines that many foreign investors switch sides and choose institutions with the same bond allocation strategy but higher returns. The head of the offshore bond enhancement fund said bluntly. Recently, he heard that some overseas investment institutions that have increased the proportion of Chinese government bonds investment to 4% (also following the WGBI index investment) have not taken exchange rate risk hedging measures, with the purpose of using the high yield and high security of Chinese government bonds to achieve high returns that exceed their peers.
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