JPMorgan adds China to emerging bond index from February 2020

By Karin Strohecker

LONDON (Reuters) - JPMorgan will add Chinese government bonds to its widely tracked emerging market local currency bond index from February 2020 - a decision expected to suck billions into the world's third largest bond market.

Nine Chinese local currency bonds will be included in the bank's Government Bond Index Emerging Markets (GBI-EM) suite in a 10-month process that will see the country's weighting rise to the maximum cap of 10% in the main index, the index team said in a note on Wednesday.

Six of the bonds have already been issued, with the others also expected to be sold this year, the note said. The main index, GBI-EM Global Diversified, has $202 billion benchmarked against it, the bank added.

Goldman Sachs calculated that the inclusion in the GBI-EM Global Diversified could pull $3 billion of investor money into China's bond market per month.

Past restrictions have prevented foreign investors from tapping local bonds in the world's second largest economy.

But Beijing has made access easier in recent years, most recently by launching the Bond Connect scheme in 2017 that allows investors to buy and sell onshore bonds via Hong Kong.

Such improvements have nudged benchmark providers to start finally incorporating China.

Bloomberg Barclays Global Aggregate Index started adding Chinese government and policy bank bonds over 20 months in April. The bonds are also on a "watchlist" to join FTSE Russell's World Government Bond Index (WGBI), with a review scheduled for September, the index provider has said.

Goldman Sachs calculates that since index membership in April, Chinese bond markets have raked in $6-7 billion of investor money a month, and predicted that joining the WGBI could translate into another $6-7.5 billion a month.

"There is value in this market. It is cheap because it is under-invested by foreign investors at the moment," said Edmund Goh at Aberdeen Standard Investments in Shanghai, whose firm had been buying Chinese bonds since last year in anticipation of the index inclusion and to diversify portfolios.

"When you look around global bond markets, about one third of bonds in negative yield, the interest rate cycle (in China) has a low correlation with others."

The inclusion is expected to reduce index yields of the GBI-EM Global Diversified and GBI-EM Global by 17 basis points and 39 basis points respectively once the process is finished.

SOME PAIN AHEAD

The inclusion of China will see some other countries suffer as investors adjust their portfolios.

According to calculations by JPMorgan, Thailand, Poland, South Africa, Colombia and Malaysia will all see their main index weightings cut by around one percentage point.

"This is one of the biggest inclusions that has happened to emerging market countries," said Abhishek Kumar at State Street Global Advisors.

"...Given the current market conditions for South Africa, this can have a small impact on debt markets."

China's inclusion will mean 20 countries are included in the GBI-EM Global Diversified index, and its market value will rise to $1.1 trillion from $926 billion, the note said.

The Chinese bonds earmarked for inclusion maturing in 2024, 2026, 2028 and 2029 traded a touch softer on the day.

(Reporting by Karin Strohecker; Additional reporting by Tom Arnold and Noah Sin; Editing by Peter Graff and John Stonestreet)