CHINA MISSES OUT ON FTSE RUSSELL SPOT
Beijing may now lose up to US$7.5b of extra investment inflows a month, says Goldman
CHINA failed to win inclusion into one of the world’s benchmark bond indexes, as FTSE Russell opted not to follow two competitors in adding the country’s domestic debt.
China would remain on the FTSE watchlist, according to a statement on Thursday that showed the firm demurred on including it in its flagship World Government Bond Index (WGBI).
The decision means China could be missing out on US$6 billion to US$7.5 billion (RM25.19 billion to RM31.40 billion) of extra investment inflows a month, according to a previous estimate by Goldman Sachs Group Inc.
While still marginal players in the world’s second-biggest bond market, foreign investors have steadily boosted their holdings to record levels as China expanded access and won inclusion in April to the Bloomberg Barclays Global Aggregate bond index.
“It’s a bit of a surprise,” said Mitul Kotecha, senior emerging markets strategist at Toronto-Dominion Bank. “Issues such as the ability to hedge may have played a part. Clearly this will mean that potentially strong inflows will now not be forthcoming, though the fact that China remains on the watchlist means that inclusion may merely be delayed.”
“To be included to WGBI, FTSE has received feedback from investors that they would like to observe further improvements to bond liquidity, and increased flexibility in FX (foreign exchange) execution and the settlement of transactions,” said Nikki Stefanelli, head of fixedincome index policy, in an emailed reply to questions.
“We see significant progress towards a future upgrade.”
The company, which is owned by London Stock Exchange Group Plc, said in its statement further updates would come “as appropriate after the interim review in March next year”.
While China has made it easier to buy its domestic securities, including through a Bond Connect with Hong Kong, some global fund managers have cited continuing concerns about limited hedging options.
Chinese bonds, including its government securities, are also much less liquid than those of other markets — the banks that dominate the market tend to buy and hold the notes.
Even so, JPMorgan Chase & Co earlier this month decided it would start a phased inclusion of Chinese sovereign debt into its emerging-market indexes from the end of February.
Bloomberg Barclays also opted for a phased process.
Bloomberg LP owns Bloomberg Barclays and Bloomberg News.
“We see high likelihood of WGBI China inclusion in next year’s review,” Citigroup Inc analysts wrote in a note.
“Further improvements in FX execution and settlement flexibility in response to investor feedback are likely” in the wake of FTSE’s decision, according to the note.
FTSE also said Malaysia remained on its watchlist for exclusion from the WGBI.