China onshore bonds will be added to the Bloomberg Barclays Global Aggregate, Global Treasury, and EM Local Currency Government indices in a staged, gradual process from April 1, 2019.
Through conversations with our fixed income teams around the world, we are clear that the inclusion of China bonds is a major event in global capital markets that every investor should be prepared for.
Investors won't be able to ignore the Chinese market and global capital allocation will shift to China
Looking at the bigger picture, we believe index inclusion across China's bond and equity markets is highly likely to force a process of rebalancing of global capital to China. China continues to drive the world economy - delivering 33% of additional GDP growth in 20191 – but China's markets account for less than 5% of invested capital globally2.
This rebalancing process is happening, with inflows into equity and fixed income markets seeing a marked increase during the past 18 months as the index inclusion processes have started to take effect. As China accounts for larger shares of global benchmarks, as we expect, flows into China will continue to grow.
Furthermore, China's growing clout in the world economy and the sheer range of investment opportunities in domestic markets mean that, eventually, a standalone allocation to China will make more sense than just including it through a comparatively restrictive emerging markets index allocation.
We speculate that as China's weight in the world's financial markets grows, its weight as a currency bloc will grow too. We live in a world dominated by the USD and Euro. But with China's steady move to internationalize its currency - through opening its financial markets, pricing oil and other imports in RMB, promoting Belt & Road, and taking a much more influential role as a trading nation in the APAC region – as well as China's huge weight in the global economy, we believe the world will evolve into a 3 bloc model: one that is euro-, Swiss franc- and sterling-denominated; one RMB-denominated in the Asia-Pacific region; and one USD-dominated.
Perspectives matter. Tune in to our insights.
What you need to know about China bond inclusion
- Bloomberg's inclusion of China onshore bonds is a major change for global capital markets and will soon propel the onshore market past Japan as the second largest in the world;
- Inclusion is also a huge opportunity to diversify sources of alpha, since the market is attractive from a yield pick-up, duration, and correlation point of view compared to other more developed bond markets;
- Now offers an excellent entry point into China fixed income because the inflows implied by index inclusion, plus the prospect of China's economy recovering, puts tighter yields in prospect later in 2019;
- China's onshore markets are more accessible than ever and investment opportunities are compelling but on-the-ground resources and knowhow remain vital to unlocking value.
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