The announcement came slightly earlier than we expected, but we think this is testament to both China's market access reforms in the past five years and overseas investors' demand for Chinese fixed income.
We see the index inclusion announcement as a big bang moment for Chinese fixed income for three main reasons.
Firstly, we believe other major indices will follow suit. Bloomberg's announcement demonstrates that international indices recognize China's steps to open its bond market and we expect other benchmark providers, like the Citibank World Government Bond Index, to surely follow.
Secondly, the RMB internationalization process will accelerate. We've had SDR inclusion, MSCI A share inclusion, central banks and sovereign wealth funds publicly announcing allocations to the RMB and Chinese bonds, countries becoming official clearing hubs for RMB, and new RMB-priced oil futures contracts starting
The reforms have been vast and the pace of reform continues to surprise on the upside. The bond inclusion from this perspective looks like a natural progression in a long list of opening-up measures already in place in China's financial markets.
Finally, the move will trigger a large-scale reallocation of capital to China's onshore markets.
Put simply, index tracking investors will have to shift their allocations to meet the benchmark weights when Chinese bonds are included, both in Bloomberg's index and other benchmarks.