The inclusion of China onshore bonds in the Bloomberg Global Aggregate Index has been flagged as the largest change in global capital markets, and will be key to opening up the country to global investors, according UBS Asset Management.
Between $353 billion to $706.1 billion has been estimated to come in as passive income, with Hayden Briscoe, head of fixed income, Asia-Pacific, UBS predicting that when active investors, central banks and wealth funds factor in China bonds, the number will reach into trillions.
The wealth manager anticipates that overseas investors will continue to increase their presence in Chinese onshore markets, continuing on from the last three years where they have tripled their onshore holdings to reach RMB 1.7 trillion ($355.9 billion) at the end of last year.
Index inclusion is also an indication of the balance of global capital markets, with the world being underinvested in China, Mr Briscoe said, compared to the country’s weight in the global economy (33 per cent of global GDP).
UBS expects other index providers to bring China into their global bond aggregates, also forcing investors to follow their benchmarks by upping their China allocations.
“We see yields continuing to drift lower after rallying strongly in 2018,” Mr Briscoe said.
“The global inflow will add a bid to the bond market and we are expecting yields to rally through 2019, while looser monetary policy and stabilization in the economy in H2 2019 plays out. As such, we believe this means now is an excellent time to position in China fixed income assets.
“In addition, we expect the RMB to strengthen as demand for RMB assets grows.”
China had to make changes to be considered for index inclusion, with the most notable, Mr Briscoe said, being the opening of the China Interbank Bond Market and Bond Connect, bringing direct access to onshore markets.
Additional changes have included real-time delivery against payment on Bond Connect, tax holidays for overseas investors trading in China and block-trading processes.
“We’ve seen tax exemptions and the introduction of block trading in the past 12 months, and we expect further moves from the Chinese government like widening the Bond Connect system to continue opening up the onshore market to international investors,” Mr Briscoe said.
The inclusion of China bonds in the index will take place from 1 April.
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