FTSE Russell’s latest annual country classification review left China on the index provider’s watchlist for potential upgrade and its huge bond market out of the FTSE World Government Bond index for now.
The firm, in explanatory notes posted on its website, said while China has continued to open its market, index users are looking for further improvements in areas such as secondary market liquidity, greater flexibility in foreign-exchange execution and the settlement of transactions.
That outcome makes FTSE Russell the odd man out among leading bond index providers.
Bloomberg was the first to move in April when it started the process to include Chinese renminbi-denominated government and policy bank bonds in its Bloomberg Barclays Global Aggregate index.
At the start of September, J.P. Morgan Chase & Co. followed suit, announcing it would begin adding Chinese bonds to its Government Bond Index-Emerging Markets index family in February.
“The issues FTSE cites concerning secondary market liquidity, the ability to conduct FX and settlement were known factors in the market; it was just a matter of how much progress FTSE felt China was making,” said Jim Veneau, AXA Investment Managers’ Hong Kong-based head of fixed income for Asia, in an email.
Given Bloomberg Barclays inclusion and J.P. Morgan’s announced inclusion for early next year, expectations were likely rising that FTSE would follow suit, so this could be viewed as a minor upset, so to speak, Mr. Veneau said.
FTSE did note that China had made significant progress improving foreigners’ access to its onshore bond market, implying that continued progress will lead to China’s eventual inclusion,” he said.
The news release said the Chinese government bond market “continues to make demonstrable progress towards meeting the criteria” needed to win the market accessibility level 2 and gain admission to WGBI."
A spokesman for FTSE Russell wasn’t immediately available for comment.
A FTSE Russell news release Thursday said Malaysia remains on the firm’s watchlist as well for potential downgrade from its current market accessibility level of 2 — the highest rating in the three-tier framework, from zero to 2, FTSE Russell introduced in early 2019.
That top accessibility rating of 2 is required for inclusion in the widely tracked WGBI index.
In the latest classification review, Israel — with a market accessibility level of 2 — will be added to the WGBI index on April 1, with a projected weighting of 0.29%.
For equities, FTSE Russell announced that Romania, currently a frontier market, will be reclassified as a secondary emerging market in September 2020, while Tanzania — currently unclassified — will be elevated to frontier market status at the same time.
Argentina, meanwhile, with a frontier market classification, was taken off FTSE Russell’s watchlist for potential reclassification to secondary emerging market status because of that country’s imposition of capital controls.
Vietnam was retained on the watchlist for possible reclassification from frontier to secondary emerging market status.