The Daily Update - China Index Inclusion and Renminbi Internationalisation

Greater and better representation of growing or important bond markets in global indices continues to be an important theme this year. For example, we have highlighted the inclusion of Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE in the JP Morgan Global Diversified Emerging Market Bond Index (EMBI-GD) in phases from January 2019 and how this is helping to promote greater investor interest in and flows into the GCC region. But also of great importance is the greater representation of China’s local bond market in global indices: as of April 2019 the Bloomberg Barclays Global Aggregate Index will start to include renminbi denominated onshore Chinese government and policy bank bonds.

364 onshore Chinese bonds are to be included over 20 months with estimates suggesting China’s weight in the Bloomberg Barclays Global Aggregate Index will rise to 6.1% on completion (November 2020) and renminbi bonds are expected to be the fourth largest currency component. Estimates suggest full inclusion could attract as much as ~USD150bn of inflows: China’s USD13tn bond market is the third largest and under-represented in investor portfolios with foreign holdings estimated at only 2 percent of the market. This trend is expected to continue as FTSE Russell is expected to review whether to include Chinese government bonds in its World Government Bond Index and J.P Morgan is also expected to review local currency Chinese government bonds for inclusion (in JPM GBI EM-GD index).

We continue to expect that greater index inclusion and improved market accessibility will support investor inflows into China and reinforce the case for continued internationalisation of the renminbi. YTD the offshore renminbi (CNH) has appreciated 2.29% against the US dollar (spot return) and 3.1% on a total return basis (at time of writing) and over the medium term we would expect the renminbi to continue to appreciate versus the US dollar. An agreement on the US-China trade impasse is likely to add support to the renminbi, although calling the timing of a peak in the US dollar despite a more dovish Fed is tricky. The US dollar is a relatively high yielder amongst the currency majors, particularly with weaker growth in Europe and uncertainties pushing the ECB to keep an accommodative policy stance and BOJ Central Bank Governor Kuroda emphasising further easing remains an option if required.

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