Inclusion of China bonds in Bloomberg index a timely counterweight to US tariffs

World markets are taking another step to embrace China. Bloomberg will add the country’s government and policy-bank bonds to the Bloomberg Barclays Global Aggregate Index. That should attract foreign investors and encourage more liberalization. It’s also a useful reminder that flows of money far outweigh those of goods and services.

China’s $9 trillion domestic bond market is the world’s third-largest after the US and Japan, according to AsianBondsOnline, but most international investors have little exposure.

China has been gradually opening its market doors, though. Last year Beijing opened up a channel for investors to access its bond market through Hong Kong, known as the Bond Connect scheme. MSCI will also include some Chinese domestic A shares in its stock indexes starting in June.

Bloomberg is the first of the big three bond indexers, ahead of Citigroup and JPMorgan, to admit China into its global index. Beijing still needs to improve settlement terms and clarify tax issues before April 2019, when the index outfit plans to start phasing in Chinese bonds.

Eventually China’s qualifying bonds will represent over 5 percent of the global aggregate index. With some $2 trillion in assets tracking the benchmark, the move could generate roughly $100 billion of inflows. Analysts at Standard Chartered estimate inflows of up to $286 billion if all three indexers include Chinese bonds.

It’s still early days. Notwithstanding the IMF’s inclusion of the yuan in its SDR currency basket two years ago, the yuan accounts for just 1 percent of global central bank reserves. But the potential is enormous, with China on track to overtake the US as the world’s largest economy in the next decade.

The bond index news landed one day after US President Donald Trump announced new tariffs on Chinese imports. The levies are aimed at reducing the US trade deficit with China, which hit $375 billion in 2017. But money flows vastly exceed those of goods and services, with daily trading in currencies averaging more than $5 trillion and interest-rate derivatives nearly $3 trillion. A move that encourages more financial transactions with China offsets Trump’s barriers to traditional trade.