Chinese bonds added to Bloomberg benchmark index to bring over 1 trillion USD to China, economist says
Chinese bonds' debut in the Bloomberg Barclays Global Aggregate Index in early April is estimated to drive over 1 trillion U.S. dollars of foreign investment into China's bond market over the next decade, a Goldman Sachs expert said on Monday.
"It's important to keep in mind that the majority of our estimated one trillion USD inflow will likely come from central banks and sovereign wealth funds, and they are less affected by the impact of index inclusion," said Danny Suwanapruti, an economist at the research division of Goldman Sachs, in a research note.
"Nonetheless, the index inclusion reflects significant progress in the development of the domestic bond market," he added.
The Bloomberg Barclays Global Aggregate Index has begun to include China's yuan-denominated government and policy bank bonds since April 1, with a 20-month phase-in period.
Valued at around 12.84 trillion dollars by the end of 2018, China's domestic bond market is currently the third largest in the world, according to the People's Bank of China.
Noting China's leap forward, the economist said that the Chinese authorities have made significant efforts in addressing issues used to obstruct investors, such as capital restrictions, hedging difficulties and insufficient market liquidity.
Effective measures include providing overseas financial institutions direct access to the interbank bond market in 2016, and introducing the Bond Connect program in 2017, which allows global investors to make onshore bond purchases via accounts in Hong Kong, said the expert.
He then pointed out foreign inflows have also benefited China by reducing the burden on domestic financial institutions and providing Chinese savers more instruments to put their money in.
"On a macro level, they help offset capital outflows and increase the usage of the RMB in international markets," Suwanapruti said.
"On a micro level, the presence of foreign investors can improve credit analysis and spur the development of the corporate bond market," he added, praising policymakers' greenlights for foreign rating agencies to operate in China.