September 4, 2019 / 12:34 PM / 19 days ago

UPDATE 2-JPMorgan adds China to emerging bond index from February 2020

 (adds quotes, details, table)
    By Karin Strohecker
    LONDON, Sept 4 (Reuters) - JPMorgan will add Chinese
government bonds to its widely tracked emerging market local
currency bond index from February 2020 - a decision expected to
suck billions into the world's third largest bond market. 
    Nine Chinese local currency bonds will be included in the
bank's Government Bond Index Emerging Markets (GBI-EM) suite in
a 10-month process that will see the country's weighting rise to
the maximum cap of 10% in the main index, the index team said in
a note on Wednesday.
    Six of the bonds have already been issued, with the others
also expected to be sold this year, the note said. The main
index, GBI-EM Global Diversified, has $202 billion
benchmarked against it, the bank added.
    Goldman Sachs calculated that the inclusion in the GBI-EM
Global Diversified could pull $3 billion of investor money into
China's bond market per month. 
    Past restrictions have prevented foreign investors from
tapping local bonds in the world's second largest economy. 
    But Beijing has made access easier in recent years, most
recently by launching the Bond Connect scheme in 2017 that
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
scheduled for September, the index provider has said.

    Goldman Sachs calculates that since index membership in
April, Chinese bond markets have raked in $6-7 billion of
investor money a month, and predicted that joining the WGBI
could translate into another $6-7.5 billion a month.
    "There is value in this market. It is cheap because it is
under-invested by foreign investors at the moment," said Edmund
Goh at Aberdeen Standard Investments in Shanghai, whose firm had
been buying Chinese bonds since last year in anticipation of the
index inclusion and to diversify portfolios.  
    "When you look around global bond markets, about one third
of bonds in negative yield, the interest rate cycle (in China)
has a low correlation with others."
    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. 
    
    SOME PAIN AHEAD
    The inclusion of China will see some other countries suffer
as investors adjust their portfolios.
    According to calculations by JPMorgan, Thailand, Poland,
South Africa, Colombia and Malaysia will all see their main
index weightings cut by around one percentage point. 
    "This is one of the biggest inclusions that has happened to
emerging market countries," said Abhishek Kumar at State Street
Global Advisors. 
    "...Given the current market conditions for South Africa,
this can have a small impact on debt markets."
    
                            
                                                
 CHINA                      10%                -
 BRAZIL                     10%               10%
 MEXICO                    9.95%              10%
 INDONESIA                 9.47%              10%
 THAILAND                  8.32%             9.37%
 POLAND                    7.86%             8.86%
 SOUTH AFRICA              7.51%             8.49%
 RUSSIA                    7.11%             7.99%
 COLOMBIA                  5.54%             6.56%
 MALAYSIA                  5.17%             6.12%
 HUNGARY                   3.70%             4.38%
 CZECH REPUBLIC            3.33%             3.95%
 PERU                      3.20%             3.80%
 TURKEY                    3.09%             3.66%
 CHILE                     2.94%             3.49%
 ROMANIA                   2.09%             2.48%
 PHILIPPINES               0.25%             0.30%
 DOMINICAN REPUBLIC        0.17%             0.20%
 URUGUAY                   0.16%             0.19%
 ARGENTINA                 0.15%             0.17%
                                        Source: JPMorgan
    
    China's inclusion will mean 20 countries are included in the
GBI-EM Global Diversified index, and its market value will rise
to $1.1 trillion from $926 billion, the note said.
    The Chinese bonds earmarked for inclusion maturing in 2024
, 2026, 2028 and 2029
 traded a touch softer on the day.
   

 (Reporting by Karin Strohecker
Additional reporting by Tom Arnold and Noah Sin
Editing by Peter Graff and John Stonestreet)
  
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