Chinese government bonds will be phased into the FTSE World Government Bond index over a longer period than previously announced.
The index provider published Monday the results of its latest semi-annual country classification review for fixed income and equities, confirming that Chinese government bonds would be introduced starting Oct. 29.
However, the period over which the bonds will be included will occur over 36 months rather than over a 12-month period as announced in FTSE Russell's September review.
The extension of the implementation period reflects feedback received during a February market consultation and comments made at FTSE advisory committee meetings, a technical note outlining the decision said.
"In the light of this feedback, it has been determined that a more conservative implementation schedule is appropriate which recognizes the passive nature of WGBI mandates and the material monetary inflow emanating from index inclusion."
The initial inclusion date of the bonds in the index was also slightly adjusted to reflect a one-week Chinese market holiday in early October and "that some clients may need longer onboarding time to access the market." For the October 2021 inclusion to happen, a spokesman said, it would have needed to begin on the last trading day of September. He added that the rebalancing of fixed-income indexes is done each month at month-end, unlike equities, which are typically rebalanced quarterly, semi-annually or annually.
Since the September announcement, when FTSE Russell first said Chinese government bonds would be included in major indexes, the index provider has engaged with Chinese authorities and market stakeholders to monitor market enhancements and recent reforms that facilitate easier participation by international investors. Changes include simplification of the account opening process, the option to transact foreign-exchange with third parties and the option to lengthen the settlement cycle — the period between trade execution and completion — beyond three days.
"The decision to add the second-largest bond market in the world to our flagship global government bond index reflects our robust index governance process and regular engagement with global investors, regulators and other key market participants," Waqas Samad, CEO at FTSE Russell, said in a news release.
At the end of February, foreign investors' holdings of Chinese bonds was 3.7 trillion yuan ($566.9 billion), Pan Gongsheng, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, said in the same release.
FTSE Russell also said Malaysia's sovereign debt market will be removed from its watch list following recent market enhancements, meaning the market remains part of the World Government Bond index. Indian and Saudi Arabian government bonds were added to the watch list for potential future inclusion in the FTSE Emerging Government Bond index.
The index provider also said that, effective March 31, the objective and transparent FTSE fixed-income classification process will be expanded to assign market accessibility levels to inflation-linked government bond markets. The move was welcomed by index users "as a positive enhancement to the approach taken by FTSE Russell to track inflation-linked government bond markets given the recent increase in attention to this asset class by global investors," the release said.
FTSE Russell also published its equity country classification review, announcing that Russia and Vietnam will remain on the watch list. Russia was added in the September review for possible reclassification to advanced emerging market status from secondary emerging, while Vietnam was added to the watch list in September 2018 for possible reclassification to secondary emerging market status from frontier.
