Asset Allocation China Fixed Income Article

China Joins the Global Aggregate

A Practical Guide For Investors

15 February 2019

1 min read

What You Need to Know

China will join the Bloomberg Barclays Global Aggregate Index on April 1, effectively redrawing the world map of fixed-income investment. For global investors, there are benefits and risks associated with investing in Chinese government bonds. We’ll address the big ones, including tax implications and questions about trading systems.

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6%

The approximate share of the index to be made up of Chinese government and policy bank bonds once the 20-month phase-in is complete,

as of January 24, 2019 data.

$11 Tril

The size of China’s onshore bond market,

as of December 31, 2018.

4%

Foreign ownership of the Chinese onshore bond market (excluding money market instruments),

as of December 31, 2018.

Index inclusion is a milestone for China and its efforts to open its capital markets, boost demand for its currency and attract overseas investment. It also represents a pivotal change for global bond markets and an opportunity for global investors. Chinese bonds offer relatively high yields (nominal and real), and attractive diversification benefits. And index inclusion gives investors an easier way to access the world’s third-largest government bond market and second-largest economy.

We have been investing in China’s fixed-income markets since 2011. But that makes us a minority among foreign investors. Despite rapid growth in the size of China’s bond market over the last decade, foreign investors remain bit players. According to Chinese financial data provider Wind, foreign institutional investors held just 4% of the broad market as of December 31, 2018.

That’s about to change. Global bond investors will soon have to decide whether they will continue to use the Global Aggregate Index as a benchmark or adopt the Global Aggregate ex-China. And they will have to take several practical steps no matter which decision they make.

Despite Rapid Growth, Chinese Bonds Still Off Global Investors’ Radar

Annual Market-Size Trend*; RMB, Trillion

Despite Rapid Growth, Chinese Bonds Still Off Global Investors’ Radar

*Excludes money-market instruments
†PBOC: People’s Bank of China
As of December 31, 2018
Source: Wind and AB

This FAQ is intended to provide guidance as you make your decision. It answers the most common questions we receive about the benefits and risks of investing in China, the effects of Chinese index inclusion on the global bond market and whether to hedge out Chinese currency exposure.

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