JPMorgan will include Chinese government bonds in its widely tracked Government Bond Index Emerging Markets (GBI-EM) suite from February 2020 onwards in a staggered process that will see the country's weighting rise to 10 percent, the bank said on Wednesday.
The milestone inclusion is expected to draw billions of foreign dollars into China's $13 trillion bond market, the world's third largest. The phasing in of the nine eligible government bonds will happen over a 10-month period in equal steps starting on February 28, the bank's index team said in a note to clients.
Of the bonds to be included, six have already been issued with another three expected to be sold during the remainder of the year, the note said. The main index of the suite, GBI-EM Global Diversified, has some $202 billion benchmarked against it, the bank added.
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. For many years, restrictions have prevented foreign investors from tapping local bonds in the world's second largest economy. But Beijing has over the years made access easier for foreign investors, most recently by launching the Bond Connect scheme in 2017, which 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 set to take place in September, the index provider has said.
The inclusion of China's vast bond market in one of the asset classes' key indexes will see some other countries suffer as investors adjust their portfolios to reflect China's entry.
According to calculations by JPMorgan, countries such as Thailand, Poland, South Africa, Colombia and Malaysia will all see their weightings in the main index reduced by around one percentage point.