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The future is now: index inclusion for Chinese bonds

The Emerging View

22 March 2019

Chinese local currency government bonds enter the Bloomberg Ag next month. What does this mean for investors in developed bond markets? We estimate efficient allocations to Chinese bonds for USD, EUR, GBP and JPY-based investors using performance data for the past five and ten years. We also estimate the efficient allocation to Chinese bonds for USD-based investors in a forward-looking framework and in USD-hedged portfolios. We find that Chinese bonds offer meaningful advantages to investors in all these contexts. We therefore expect significant participation as index inclusion gets underway. Some USD 300bn is likely to flow into the Chinese bond market in the first rounds of index inclusion. This is roughly equivalent to one third of all outstanding bonds in the entire Dollar-denominated EM sovereign government bond market.

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