The Daily Update - China Index Inclusion and Renminbi Internationalisation

Bloomberg recently announced that it will add Chinese RMB denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index. The addition is expected to be phased in over 20 months starting from April 2019 and once ‘several planned operational enhancements’ are implemented by the PBoC and Ministry of Finance. Bloomberg note that enhancements such as ‘the implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies’ still need to be made by the inclusion date to avoid any delays.

When fully included local currency RMB bonds will be the fourth largest component behind the US dollar, euro and Japanese yen in the Global Aggregate Index. Bloomberg note, using end of January 2018 data, that Chinese securities would represent 5.49% of the USD 53.73tn index.

China is the second largest global economy by nominal GDP, its bond market is the third largest (at close to USD 11tn) yet it is under-represented in foreign investors’ portfolios. Foreigners own less than 2 percent of the market. Moreover, for those wanting to take renminbi exposure, sovereign yields are relatively attractive (e.g. 10-year onshore Chinese Government Bond yield ~3.7%) with the potential for currency appreciation for an A1/A+ (Moody/S&P) rated sovereign with a strong net foreign asset profile.

It seems inevitable that index inclusion and improved market accessibility will continue to support investor inflows into China and reinforce the case for continued internationalisation of the renminbi. Year to date the offshore renminbi (CNH) has appreciated 3.76% against the US dollar (spot return) and 4.85% on a total return basis (at time of writing) and over the medium term renminbi stability looks well underpinned.

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