For the first time, renminbi-denominated debt will now be included in a major global benchmark index, the Bloomberg Barclays global index, giving foreign investors the opportunity to invest in China’s largely untapped bond market. Marketwatch reports:
The move means now foreign investors will now be able to participate in a largely untapped Chinese bond market, which is estimated to be as large as $11 trillion. Bloomberg is the first to include debt from the world’s second-largest economy into a major global benchmark index. At the moment, foreign investors hold around 2% of its onshore debt.
This follows after the country unveiled the Bond Connect last year, which allows outside investors to purchase Chinese bonds without prior approval from domestic financial regulators. In the past, money managers had to fly to Beijing to apply for a quota through the Qualified Foreign Institutional Investor Program.
Investors say China’s inclusion in widely followed bond-market indexes is following the preference for regulators to stagger access to its domestic financial markets. MSCI admitted Chinese domestic A-shares into its global stock market indexes after China launched its Shenzhen-Hong Kong stock index scheme.
The moves are not exactly surprising, especially given China’s increasing interest in keeping its capital account inflows strong. Still, they do reveal one potential unexpected consequence of a trade war–or threats of US tariffs. In short, if the US pushes for more financial liberalization in the Mainland, China may well oblige. However, reforms could ironically result in more capital inflows from the US, not less.