Bloomberg has gone where MSCI feared to tread, becoming only the second major index provider to include China’s onshore markets in widely-followed benchmark indices in a move that could prompt rivals to follow suit.
China is home to the world’s second-largest stock market and the third-largest bond markets, but its tight control of onshore activity has made its inclusion in flagship indices contentious, with many investors arguing that it must relax its grip before they can invest comfortably.
On Wednesday, Bloomberg said its Bloomberg Barclays bond indices would create a parallel index that incorporated onshore Chinese government bonds and some bank debt into its flagship global aggregate index, while also maintaining its current, renminbi-free global benchmark.
The move will allow investors a choice of which to follow without forcing them to allocate funds onshore in China.
“This is a hugely positive step in our view,” said Becky Liu, macro China strategist at Standard Chartered. “This move will likely invite an increase of foreign participation in China’s onshore bond market in 2017, especially with the Chinese government already hinting to resolve a number of key issues this year.”
Bloomberg is the first index provider to include bonds in its global offerings but its move mirrors a similar decision by FTSE almost two years ago to include onshore equities in its flagship emerging markets index. Like Bloomberg, FTSE runs that index in parallel to its existing benchmark as part of what it termed “transition indices”.
China’s vast interbank bond market has attracted international attention in the past year after a surprise decision by Beijing to allow foreign investors greater access. Foreigners hold about 2 per cent of the onshore $9.4tn interbank bond market — and about the same amount of mainland stock markets.
“Our view is that many fund managers believe China will ultimately be included in the [Bloomberg Barclays] global aggregate, meaning they need to study and follow the China market,” said CG Lai, head of global markets for Greater China at BNP Paribas. “Having two sets of indices will allow fund managers to introduce this investment opportunity to their clients and help educate them, too.”
Speculation had been rising that both JPMorgan and Bloomberg were considering including onshore bonds following investors’ increased access. JPMorgan’s EMBI indices are considered the benchmark for the emerging markets bond universe.
Last year MSCI, the biggest equity index provider, dealt a blow to hopes of broad inclusion of China in international benchmarks when it decided not to add so-called onshore A-shares in its equity market flagships.
But many investors still consider wider inclusion of both bonds and equities a matter of if, not when, and point to China’s relaxing of controls over the past decade. The country has increased the size of foreign investors’ approved quotas while introducing approval-free systems such as the Stock Connects that allow investors in Hong Kong to buy and sell mainland shares directly.
“The direction of travel here is clear — I think in an ideal world the authorities in China want all of these financial instruments to be included in the globally traded indices,” said Tim Orchard, Fidelity’s chief investment officer for Asia-Pacific, excluding Japan. “The doors are being slowly opened but it has to be done in a stage-managed way.”