From the end of October, the FTSE Russell World Government Bond Index (WGBI) will gradually incorporate Chinese government bonds over the next 36 months, and the agency expects $100 billion to flow into China's bond market in the next 36 months.
On October 29, WGBI officially included Chinese bonds. The first financial reporter previously reported that some traders observed that on October 20, the renminbi rose above the 6.4 mark against the US dollar, and 12.7 billion yuan of funds poured into Chinese treasury bonds and policy financial bonds on the same day, far exceeding the normal daily average level. Given the strong momentum of capital inflows and the continued record highs in exports, institutions generally expect the renminbi to remain strong in the fourth quarter.
"Entering the rich" attracts funds to "thin water and long flow"
Liu Jie, head of macro strategy at Standard Chartered China, told reporters that the scale of foreign capital inflows into China's bond market in the first nine months of 2021 reached 623 billion yuan, and the annual inflow scale is expected to rise to 800 billion to 1 trillion yuan. From the end of October, the FTSE Russell WGBI Index will be gradually included in Chinese government bonds over the next 36 months. "According to our estimates, during the inclusion period, we will attract 100 billion to 130 billion US dollars of passive funds, with an average monthly inflow of 2.9 billion to 3.6 billion US dollars."
She said the average monthly passive inflows attracted by the "rich" of treasuries will be lower than the average monthly inflows previously included in the Bloomberg Barclays Global Aggregate Index (BBGA) and the J.P. Morgan Global Emerging Markets Government Bond Index (GBI-EM) (the inclusion period is April 2019 to November 2020), but the inflow will last longer.
Zhang Meng, a macro and foreign exchange strategist at Barclays, told the first financial reporter that in the fourth quarter, China's treasury bonds are expected to attract $10 billion inflows, reaching about $120 billion in 2022-2024.
A few days ago, China's bond market welcomed another favorable situation. On October 27, Premier Li Keqiang presided over an executive meeting of the State Council. The meeting 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, the end of 2025.
"Tax exemption is a big plus, but foreign investors do not mind paying taxes, more than tax exemption, foreign investors are more concerned about the clarity of tax arrangements, this time China clearly stated the next step after the expiration of tax exemptions, which boosted the confidence of overseas investors." The bond investment manager of a large US asset management institution told reporters.
In the future, China's interest rate bond market is expected to maintain high popularity. Zhong Haidan, senior account investment manager of Invesco, mentioned to reporters that in fact, since the opening of Bond Connect in 2017, there have been more than 3,000 registered investors, and by October 2021, the average daily trading volume has also increased by 12 times to 26.24 billion yuan. "We think this trend will continue as the Chinese bond market offers attractive investment opportunities for international investors."
"China is the second largest bond market in the world and has strong liquidity. China's onshore bonds also tend to yield higher than similar bonds in the Global Composite Index. As RMB-denominated bonds are generally less correlated with other markets, it helps international investors diversify their investments. With the inclusion of the FTSE Index, the trend towards increasing RMB asset allocation will continue. She said.
The RENMINBI remained strong in the fourth quarter
In fact, strong capital inflow momentum is the key support for the renminbi to maintain its strength. As of 12:40 Beijing time on October 29, USD/CNY was quoted at 6.3909.
Even after the stock market outflows, the bond market still received strong inflows. Overall, in fact, the inflow of funds obtained by the stock market so far this year has exceeded that of the whole of last year. In the third quarter, the net outflow of northbound funds was 5.182 billion yuan, but as of October 28 this year, the net inflow of northbound funds has exceeded the mark of 300 billion yuan (319.949 billion yuan), exceeding the net inflow of 2020 (208.9 billion yuan). Morgan Stanley China stock analyst Wang Ying told reporters that it is expected that the net inflow of northbound funds in 2021 will be 50 billion to 60 billion US dollars, and the total inflow of funds under the QFII is expected to reach 60 billion to 80 billion US dollars, about 390 billion to 520 billion yuan.
In terms of the fourth quarter, institutions are generally optimistic about the forecast of the renminbi. In addition to the momentum of capital inflows, the current account surplus due to strong exports is also a key factor.
Zhang Meng told reporters that since the third quarter of 2020, the positive correlation between the renminbi and the current account surplus has been at its strongest level ever, highlighting the importance of Sino-US trade. "Our economists expect exports to grow at an annual rate of about 25 percent in 2021 and a current account surplus of $123 billion in the first half of the year, slowing from the unusually large $216 billion surplus in the second half of 2020 (the highest level since 2014), but still very strong." In addition, the widening of the services deficit could be delayed until later in 2022. China's 'dynamic zeroing' policy on COVID-19 means that a substantial relaxation of outbound tourism will take some time. ”
Standard Chartered expects the renminbi to remain strong against a basket of currencies, with the yuan trading in the range of 6.40-6.60 against the dollar in the fourth quarter, while Barclays expects the renminbi to have a target price of 6.4 against the dollar at the end of the fourth quarter.