China’s bond market boosted by easy money policies

Yields on Chinese 10-year government bonds have returned to trade above 3%. Separately, FTSE Russell is set to include additional Chinese government debt securities in its key indexes.

Fundamental analysis: New inclusions to be made

FTSE Russell is looking to broaden Chinese government debt to its key indexes, a decision that could result in over $100 billion of new foreign capital. 

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The move would push markets in China even more into the mainstream for foreign investors, in spite of the fact that investing in Chinese assets is becoming more and more controversial in the United States due to intensifying trade tensions between the two countries.

New inclusions will bring more Chinese securities to another major market index. Because of that, many institutions will invest in those securities without thinking as most of them are looking to outshine the index’s performance. 

FTSE Russell had already included shares trading in Shanghai and Shenzhen to major stock benchmarks, just like its competitors MSCI and S&P Dow Jones Indices. However, this was the last notable holdout between bond-index compilers, following the inclusions by Bloomberg LP and JPMorgan Chase & Co.

Chinese securities will be included in FTSE Russell’s flagship World Government Bond Index in the course of 12 months starting from October 2021. The Chinese securities market is the second-largest in the world. 

Analysts provided different estimates on foreign inflows after the inclusion. The U.S. investment banking company Morgan Stanley estimated the inclusion to generate $60 billion to $90 billion in inflows, while Goldman Sachs believes the number could be as high as $140 billion.

“The Chinese authorities have worked hard to enhance the infrastructure of their government bond market,” said Waqas Samad, CEO of FTSE Russell and group director of information services for its mother company, London Stock Exchange Group PLC.

FTSE Russell said China’s restructuring plan includes “improving secondary market bond liquidity, enhancing the foreign exchange market structure and developing global settlement and custody processes.”

Technical analysis: Yields pushing higher

10y yields have returned to trade above 3% after the July correction pushed them from 3.17% to a 2.82% swing low printed in July. The aim now is to stay above the 3% mark and work to record the new 2020 high above 3.17%. 

Summary

FTSE Russell is planning to add Chinese government debt to its major indexes, a move that could lure more than $100 billion in foreign investments. In the meantime, yields on Chinese 10-year government bonds have returned to trade above 3%.