Index inclusion is a milestone for China and its efforts to open its capital markets, boost demand for its currency and attract overseas investment. It also represents a pivotal change for global bond markets and an opportunity for global investors. Chinese bonds offer relatively high yields (nominal and real), and attractive diversification benefits. And index inclusion gives investors an easier way to access the world’s third-largest government bond market and second-largest economy.
We have been investing in China’s fixed-income markets since 2011. But that makes us a minority among foreign investors. Despite rapid growth in the size of China’s bond market over the last decade, foreign investors remain bit players. According to Chinese financial data provider Wind, foreign institutional investors held just 4% of the broad market as of December 31, 2018.
That’s about to change. Global bond investors will soon have to decide whether they will continue to use the Global Aggregate Index as a benchmark or adopt the Global Aggregate ex-China. And they will have to take several practical steps no matter which decision they make.