The risks and rewards of index inclusion in China’s bond market

CHINA ADVISORY - Report 11 Nov 2019 by Andrew Collier

Changes in the Bloomberg Barclays index of bonds will expand foreign participation in China’s domestic bond market by $120 - $150 billion by 2020. Foreign ownership of Chinese financial instruments will become a wider part of both the Chinese financial system and the retirement funds of western institutions. A major US institutional investment firm noted that with bond connect (and we argue with index inclusion) international institutions are now able to trade onshore bonds without interruption, without quotas, using offshore custody and cash accounts. We believe, as they do, that these advances will make it much easier to establish, manage and market a China bond portfolio strategy to investors worldwide, and that this promises substantial flows into the asset class. In this report, we discuss the advantages and disadvantages of this rapid shift of a pool of capital into China.

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