Barclays and Citi have just taken further steps towards including Chinese bonds in some of their global fixed income benchmarks – but not the step that really counts. And as the wait goes on, more question marks are being raised about the reasons for the delay.

Citi announced yesterday that Chinese bonds were eligible for inclusion in its emerging-market and regional government bond indexes. This came just a week after the launch of new Bloomberg Barclays benchnmarks incorporating mainland debt. JP Morgan has also indicated that it is exploring inclusion of these instruments in its EM bond index, the most widely used EM fixed income benchmark.

Yet, crucially, none of the banks have included renminbi bonds in their flagship benchmarks, and they have still not given any indication of when they might do so. Inclusion would drive a substantial increase in investment flows, because it would force benchmark-based allocators, such as ETF providers, to increase their China exposure accordingly.

Still waiting

“The general expectation is that [such a move] will happen some time this year,” said Zsolt Papp, emerging-market debt client portfolio manager at JP Morgan Asset Management. “Chinese government officials also expect it to happen. But we don’t know when exactly – no one’s really holding their breath.”

Yesterday Citi said China was eligible to join three existing government bond indexes – the Emerging Markets Government Bond Index (EMGBI), Asian Government Bond Index (AGBI) and Asia Pacific Government Bond Index (APGBI). Inclusiong is due to take place in February next year.

The US bank also said it was adding two benchmarks to its World Government Bond Index series: the WGBI-Developed Markets and the WGBI-Extended. The latter will comprise 26 markets, adding China, Korea and Israel to the 23 existing WGBI constituents. However, the core WGBI remains unchanged.

Industry estimates for assets tracking Citi's EMGBI, AGBI and APGBI amount to a few billion dollars, said a Citi spokesman, while there is an estimated $2 trillion to $4 trillion referencing WGBI.

“Symbolic” move

Hence Citi’s move is not a particularly big deal, noted Simon Lue-Fong, head of EM debt at Pictet Asset Management. “It’s a positive step forward, but it’s symbolic more than anything else.”

 Simon Lue-Fong, Pictet AM

If, for instance, a fund manager wanted to use one of the new indexes, he told AsianInvestor, it would have to change the prospectus for any product it wanted to base on it, and that takes time. Hence managers are more likely to invest in Chinese bonds off-benchmark and wait for their inclusion in the main indexes, said Lue-Fong (pictured right).

What’s interesting, he said, is just how fast bonds can come to be included in the main EM indices, citing the example of Argentine debt. Argentina only returned to the global bond markets early last year after 10 years’ absence and as of February 28 this year has entered JP Morgan’s global EMBI benchmark.

“If you do things the right way, both from a country and an index perspective – or both sides dovetail quickly – it’s amazing how quickly it can happen,” Lue-Fong noted. “So for a country like China, if all the ducks are lined up and with the right will on both sides, it could happen very quickly.”

There are a number of obstacles seen to be remaining for mainland bond inclusion – such as the fact that the renminbi is not fully tradable, capital is hard to get out of China, and market access is still somewhat limited. 

Regulator caution?

Most market participants assume that Beijing wants to see benchmark inclusion happen as soon as possible and that it is the index providers holding things up.

But JP Morgan’s Papp suggested that perhaps the China Securities Regulatory Commission is questioning whether the bond market is ready for such inflows.

“If you look at China’s experience with their stock market in 2015, it’s been bit of a roller-coaster ride. They may be thinking ‘do we want this market volatility on the bond side too?’”

However, Jan Dehn, head of research at UK fund house Ashmore, argued that the Chinese regulators are ready to proceed with global bond index inclusion and that the delay is down to the banks.

“It’s a private business decision for the banks,” he told AsianInvestor. “It shouldn’t really work that way, but I understand why it does.”

Onshore progress

Still, progress is being made, said Dehn. Citi and JP Morgan said last month they had been awarded licences to operate in the mainland onshore bond market, including underwriting and settlement.

They are the first two foreign banks to receive this privilege, said Dehn, and it’s unlikely to be a coincidence that they run two influential global bond benchmarks.

“I suspect that the Chinese have had to learn – as in other areas – about how to get into indexes,” he added. “That it doesn’t only reflect what markets should be the benchmarks, but also what the investment banks want to put in them.”