JPMorgan may add China government bonds to emerging-market index

[NEW YORK] JPMorgan Chase & Co has placed China's onshore government bond market on review to be included in its emerging-market bond indexes, a move that could attract billions of dollars of foreign capital to the country and help shore up its flagging currency.

The review, which JPMorgan announced in a March 15 report, follows the People's Bank of China's statement last month that most types of overseas financial institutions will no longer need quotas to invest in the interbank bond market, which accounts for the bulk of debt in the nation.

Foreign investors have been leaving China's debt market at a record pace this year with the currency posting the biggest three-month decline through January since 1994. Inclusion would bring in funds just as China's policy makers seek to stem the yuan's losses and finance stimulus that will widen the budget deficit to a record 3 per cent of gross domestic product this year.

If accepted, China's onshore debt would have a maximum index weight of 10 per cent of JPMorgan's GBI-EM Global Diversified index, which is tracked by US$180 billion in assets, according to the report. The review was reported earlier by the Wall Street Journal.

Key issues under consideration include whether foreigners can bypass currency repatriation restrictions and the Chinese government's definition of medium and long-term investors, according to the report.

Foreign holdings of China's onshore bonds declined for a third month in February to 541.3 billion yuan (S$113.7 billion), extending a record drop of 49.6 billion yuan in January, China Central Depository & Clearing Co data shows.

Foreign ownership of yuan bonds is likely to rise to 8-10 per cent from less than 2 per cent in the next five years, Deutsche Bank AG estimates, while Standard Chartered forecast an increase of up to 7 per cent by 2020.

BLOOMBERG