Bloomberg is to add Chinese RMB-denominated government and policy bank securities to the Bloomberg Barclays Global Aggregate Index, once several planned operational enhancements are implemented by the People’s Bank of China (PBoC) and Ministry of Finance.
The addition of these securities will be phased in over a 20-month period starting April 2019.
When fully accounted for in the Global Aggregate Index, local currency Chinese bonds will be the fourth largest currency component following the US dollar, Euro and Japanese Yen. Using data as of January 31 2018, the index would include 386 Chinese securities and represent 5.49 per cent of a USD53.73 trillion index.
“Today’s announcement recognises China’s continued efforts over recent years to enhance access to the world’s third-largest bond market,” says Michael Bloomberg, founder of Bloomberg LP and Chair of the Working Group on US RMB Trading and Clearing. “It is a testament to China’s firm commitment to financial reforms and the pace of change taking place in its bond market, and another important step for China’s integration with global financial markets.”
In order to be considered for inclusion in the Global Aggregate Index, a local currency debt market must be classified as investment grade and its currency must be freely tradable, convertible, hedgeable, and free of capital controls. Ongoing enhancements from the PBoC have resulted in RMB-denominated securities meeting these absolute index rules.
Additional enhancements are required prior to the planned inclusion date to increase investor confidence and to improve market accessibility. Among these are: the implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies. Should progress on these enhancements be delayed, China’s inclusion in the Global Aggregate Index and other Bloomberg Barclays Indices may also be delayed.
“Bloomberg’s inclusion of RMB-denominated bonds in the most widely-used fixed income benchmarks represents a pivotal development for investors around the world,” says Henry M Paulson, Co-Chair of The Working Group on US RMB Trading and Clearing. “China’s new position in international bond portfolios will pave the way for robust market activity and support continued financial reforms.”
“The Chinese interbank bond markets continue to evolve, and Bloomberg will reflect the maturation of this asset class in our global benchmarks,” says Steve Berkley, Global Head of Bloomberg Indices. “Following our introduction of the China Aggregate index in 2004 and the +China indices in 2017, the official inclusion of RMB-denominated securities in the Global Aggregate Index reflects the next natural step expected by global investors.”
In addition to the Global Aggregate Index, Chinese RMB-denominated debt will be eligible for inclusion in the Global Treasury and EM Local Currency Government Indices starting April 2019.
The planned inclusion of the Chinese market in the Global Aggregate, Global Treasury, and EM Local Currency Government Indices will be phased in over a 20-month period, starting in April 2019 with a scaling factor of 5 per cent and increasing in 5 per cent increments each month. Bloomberg will review the speed of implementation on an annual basis, per the company’s governance process.
Bloomberg will create ex-China versions of the Global Aggregate, Global Treasury and EM Local Currency Government Indices for index users who wish to track benchmarks that exclude China. Bloomberg will also offer to create customised capped versions of the indices for investors looking to limit exposure to China.
