UK bourse deal may give boost to Chinese bonds

The London Stock Exchange's acquisition of Citigroup's fixed income analytics unit may accelerate the inclusion of Chinese bonds on Citi's main bond indexes, analysts in London said on May 30 after the exchange announced the $685 million (610 million euros; ￡532 million) purchase.

"It will push the index inclusion forward, because business with China will be a bigger part of the LSE's business than it will be a part of Citi's business," says Jan Dehn, head of research at London-based Ashmore Investment Management.

Currently, China's $7 trillion interbank bond market is the third-biggest in the world, but foreign ownership is less than 2 percent, much lower than other key emerging markets' average of 20 to 30 percent.

This mismatch points to opportunities for foreign investors to buy Chinese bonds for appreciation and risk diversification. But momentum has not yet picked up because the big three global indexes - Citi, Barclays and JP Morgan??do not include Chinese bonds.

Dehn said the London Stock Exchange could now be acting to take first-mover advantage.

"Once one major index provider gets serious, the others will have to follow or risk losing market share," Dehn says. "Usually, markets end up with just one benchmark index as the dominant one."

The exchange has focused on cementing its China links in recent years. In 2015, the bourse's own index arm, FTSE Russell, became the first major foreign index provider to start tracking China's onshore bond market.

A feasibility study to link the London and Shanghai stock exchanges is underway, and 19 exchange-traded funds tracking Chinese stocks and bonds are already traded on the LSE. One of those is the Fullgoal FTSE China Onshore Sovereign and Policy Bank Bond 1-10 Year Index ETF, launched on the London Stock Exchange in 2016.

So far, Fullgoal's ETF has only attracted 8 million euros of international investment, but Fullgoal Asset Management's head of international business, Michael Chow, says the potential "is huge" when index inclusion happens.

"Without index inclusion, it's hard to get international investors interested, but we firmly believe inclusion will be sooner rather than later."

Chow says index inclusion acceleration may lead to synergy achieved between FTSE Russell and Citi's index teams.

Others disagree. "I would not expect inclusion criteria to be relaxed just because the owner has changed," says Wilfred Wee, a portfolio manager at London-based Investec.

He says index inclusion still requires Chinese bonds to have easier foreign access, simpler operational requirements and more conventional trade settlement procedures.

cecily.liu@mail.chinadailyuk.com

(China Daily European Weekly 06/02/2017 page26)