Chinese government bonds will be included in the FTSE World Government Bond index starting in October 2021, following ongoing progress by China to open its market to foreign investors.
Index provider FTSE Russell said in a news release late Thursday that the start date is subject to final affirmation in March from members of its advisory committees and other index users. China's inclusion will then be phased in over a 12-month period.
Details on China's expected weighting in the index could not immediately be learned.
China was added to FTSE Russell's watchlist for inclusion in the fixed-income index in 2018. Since then, authorities have made significant improvements to market infrastructure to expand access to the roughly $16 trillion market to global investors, including extending bond trading hours to 8 p.m. Beijing time, a move that became effective Sept. 21. Secondary market bond liquidity and foreign-exchange market structure have improved, while global settlement and custody processes have been developed, the news release said.
Chinese authorities are also working on additional reforms.
FTSE Russell's decision follows those of Bloomberg in 2019 and J.P. Morgan Chase & Co. this year to include Chinese bonds in their indexes, said Abhishek Kumar, managing director, sector head-emerging markets debt, fixed income beta at State Street Global Advisors, in a statement.
Mr. Kumar said the inclusion will "come at the expense of U.S., Europe, Japan and U.K. (weightings) with redistribution of weight away from these countries to China."
About $1 trillion in assets track the WGBI in passive strategies, with another $1 trillion to $3 trillion in actively managed strategies also tracking the index.
"Based on these estimates and the likely weight of China in the index, flows can be around $150 billion, though these will be staggered over months and most of it will likely start closer to the inclusion date," Mr. Kumar said.
While significant price action is not expected for the countries losing weightings to China, nor for China itself, "it has the potential to be a problem given the size of government borrowing related to (COVID-19). While investors are increasingly buying government debt at exceptionally low yields, as situation normalizes, an increased selling pressure coupled with additional selling due to China's inclusion may exacerbate any price action and therefore it is an event worth watching very closely," Mr. Kumar said.
The decision formed part of FTSE Russell's September fixed-income review. The index provider also said Malaysia remains on its watchlist for a potential downgrade, while Nigeria, Saudi Arabia and Vietnam were added to the list of stand-alone indexes and are under consideration for inclusion in the FTSE Emerging Market Government Bond index.
Following its equity country classification annual review, FTSE Russell said Vietnam remains on the watchlist for reclassification as a secondary emerging market; Russia will be added to the watchlist for reclassification as an advanced emerging market and Argentina will move to "unclassified" from frontier market status.