Can China’s bond inclusion on the Bloomberg Barclays Global Aggregate Index save its slowing economy?
- Chinese government and policy bank bonds will be added to the index for the first time on Monday, a move analysts say could be worth US$150 billion
- China is in the process of opening up its markets to foreign investors, a move reiterated by Premier Li Keqiang at the Boao Forum for Asia last week in Hainan
The inclusion of yuan-denominated bonds for the first time on one of the most followed global benchmark indices on Monday comes at a critical juncture of China’s economy.
Chinese government and policy bank bonds are being added to the Bloomberg Barclays Global Aggregate Index over a 20-month period, a move that analysts predict will draw around US$150 billion of investment into China.
China sorely needs to finance its slowing economy especially since its current account, an important indicator of the economy’s health, is set to swing into a deficit in the coming year, analysts said.
Its trade position is also deteriorating as any deal reached with the United States would likely require it to buy more goods and services from the US. China’s overall transformation towards a service-oriented economy also, by default, means a higher tenancy for imports, adding further pressure to a trade deficit.
There will be capital inflows to finance the potential deficit. [China] would have to make [its markets] more attractive for foreigners in any shape and form. All the way from regulation to incentivising with higher interest rates.
Hence, the world’s second largest economy is banking on up to US$1 trillion of fresh investment generated by a pipeline of major global index inclusions of yuan-denominated bonds and equities to fund the nation’s deficit.