Many emerging debt investors will be getting more exposure to local currency Chinese bonds from February next year. That’s when liquid CNY-denominated Chinese government bonds will start to be included in the flagship JP Morgan EM suite of indices, among the most widely followed emerging local debt benchmarks.
It’s the latest step in the integration of China’s debt markets into the global mainstream, which we’ve written about several times now on Emerging Perspectives.
As we noted back in April, the question for investors when considering Chinese bonds is rapidly moving from ‘if?’, to ‘when, how much and how?’. From a long-term perspective, we remain positive on the opportunity of investing in the Chinese bond market.
To be phased in over 10 months from 28 February 2020 (a date picked to avoid the lower-liquidity Chinese New Year period), inclusion in the flagship JP Morgan EM indices will see Chinese bonds reach the following weights:
- GBI-EM Global Diversified: 10% (capped)
- GBI-EM Global: 15.21%
- GBI-EM (Narrow) Diversified: 10% (capped)
- GBI-EM (Narrow): 19.95%
Other key points to note:
Eligibility: Nine issues are expected to be included, all of which must have a minimum instrument size of US$1 billion and minimum remaining maturity of 2.5 years post-phasing (i.e., maturing after 28 April 2023).
Yield/duration impacts: Inclusion is expected to improve overall credit quality while lowering the yield on the GBI-EM Global Diversified by 17bps, and on the GBI-EM Global by 39bps. Index durations won’t change significantly.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
Investments carry a risk of capital loss.