On 23 March 2018, Bloomberg announced that it will add Chinese renminbi-denominated government and policy securities to the Bloomberg Barclays Global Aggregate Index, subject to a number of planned operational enhancements to be made by the People’s Bank of China and the Ministry of Finance. These securities include debt issued by the China Treasury, and three policy banks: China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China. Upon full inclusion, the index would contain 386 Chinese securities, collectively representing 5.49% of its value (using January 2018 data). The change will be implemented over a 20-month period beginning in April 2019.
The Bloomberg Barclays Global Treasury and EM Local Currency Government Indices will also add Chinese RMB-denominated debt starting April 2019.
In March 2017, Bloomberg launched a parallel index that includes China securities, namely the Global Aggregate + China Index. The inclusion of China securities in the Bloomberg Barclays Global Aggregate Index, one of the most widely followed fixed income benchmarks, represents Bloomberg’s further acknowledgement of the ongoing evolution of the Chinese interbond markets. That said, this announcement was somewhat of a surprise given that Bloomberg’s February 2018 index review made no mention of China.
In March 2017, Citi, also added China bonds to its Emerging Markets and regional government bond indices.
For a local currency debt market to be included in its Global Aggregate Index, Bloomberg requires the market to be classified as investment grade and its currency must be freely tradable, convertible, hedgeable and free of capital controls. While Bloomberg acknowledged that China has met these rules, there are further enhancements that the Chinese regulators need to implement before inclusion can proceed, these include: (1) the implementation of delivery versus payment settlement, (2) the ability to allocate block trades across portfolios, and (3) clarification on tax collection policies.
Bloomberg mentioned that if the implementations of these enhancements are delayed, the inclusion of China in the Global Aggregate Index would also be delayed.
The inclusion of China onshore government debt into international bond indices represents another big step forward in China’s opening of its domestic capital markets.
From an investor’s perspective, it is important to understand how these changes might affect the indexes underpinning various bond ETFs. Bond indices have various nuances (e.g. capped/uncapped, regional, maturity band, country exclusions, corporate/government), and, as a result, China’s weighting could be quite different across them subsequent to the inclusion of China onshore government debt. For example, the Bloomberg Barclays EM Local Currency Government + China Index has a nearly 40% weight in China, suggesting that China’s weighting could be around 40% in the Bloomberg Barclays EM Local Currency Government Index after the inclusion. However, a capped version of the index would only put China’s weighting at 10%.