FX EMERGING MARKETS
it. There are many obstacles for it to overcome, including inertia. However, even if it eventually is only used by China’s large oil companies (PetroChina, Sinopec, and CNOOC) to hedge, it may have a critical mass that eluded Japan
and
S ing a p o r e ’ s attempt to have a benchmark in Asia. Yet ideas that the contract would end the so-called petro- dollar (since a deal in the 1970s, OPEC has agreed to price
oil in
dollars) seems far-fetched.
It was recently a n nou nc e d that Bloomberg Barclay’s Global A g g r e g a t e Bond Index will include Chinese g o v er nmen t bonds and bonds of some of the policy banks. The inclusion will be phased in starting next April (2019). When the process is completed (it will take nearly two years), some 386 Chinese securities will be included. Chinese bonds will have nearly a 5.5% weighting in the index, putting it into fourth place behind the US, Europe, and
40 FX TRADER MAGAZINE April - June 2018
Chinese officials are understand
the Trump trying to Administration as it represents a break from the past
authority to hedge the currency exposure, and last July opened a Bond Connect program that made it easier for foreign investors to access the local bond market from Hong Kong.
JP Morgan is reportedly considering adding China to its Government Bond
Index-Emerging Markets Japanese issues.
China’s domestic bond market is roughly $7 trillion. Foreign ownership is estimated at about 2%. A year ago, Chinese officials granted foreign investors
Global Diversified. A decision is expected later this year. year
A
launched modified versions of its benchmark
ago, Bloomberg Barclays to include Chinese
bonds. Last July, Citi included Chinese domestic bonds to three of its emerging market and Asian indices.
Over time, the
inclusion in the benchmarks may see significant passive inflows into China of between $400-$500 bln, according to some estimates. Still, the near- term progress may be slow. Many investors are wary of the capital controls and some processes need to be worked out (e.g., settlement
process of the Bond Connect).
In some ways this mirrors MSCI’s decision to include “A shares” in its Emerging Market Index starting in the middle of this year. Over time, more mainland shares will be included. Separately, there is much talk in China of trying to re- shore some listings, through China
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