* Chinese bonds could be included in global benchmarks ‘next year’
* Inclusion of Chinese equities in benchmarks seen in 1-2 years
* FTSE, MSCI declined to add Chinese shares to key index this year
* Investors lack confidence in permanence of equity market reforms
By Michelle Price
HONG KONG, Oct 5 (Reuters) - China’s bond market could be included in global indices before its stocks because government interventions have dented foreign investor confidence in Beijing’s commitment to equity market reform, the global CEO of index provider FTSE Russell said.
Mark Makepeace told Reuters on Wednesday it was “possible” global bond index providers would move ahead of the major equities index firms to include China, after the government threw open its bond market to foreigners earlier this year.
“I see no reason why the Chinese bond indices can’t be included in the global indices, and I would expect that to happen over the next year. That market has opened up an awful lot, so that will happen,” Makepeace added.
Last week, LSE Group-owned FTSE Russell said it would not include domestic Chinese equities in its emerging markets index, aligning with U.S. index firm MSCI’s June decision not to grant the so-called A shares emerging market status.
FTSE Russell, one of the world’s largest index providers, said that China had made positive steps to open up its equity market, but investors continue to harbour concerns over remaining capital controls and the government’s willingness to directly intervene in the stock market.
Global index inclusion would be a major coup for China, drawing hundreds of billions of investment dollars into the country from global mutual funds tracking the benchmarks.
In mid-2015, amid crashing share prices, Chinese regulators unveiled a series of measures to prop up the country’s retail investor-dominated stock market. These included letting companies suspend trading in their stocks, a move that spooked global foreign investors.
Makepeace said Chinese authorities, in addition to removing remaining capital controls, need to reassure foreign investors that equity market reforms would be permanent.
“It is realistic to think that A shares can come into global benchmarks within a year or two years, but we do need to see a level of engagement with foreign investors step-up,” he added.
By contrast with 2015 moves on shares, the People’s Bank of China in February removed restrictions on foreigners investing in the country’s onshore bond market, the third largest globally and one dominated by professional investors.
JP Morgan and Citigroup, which operate the most widely used emerging market bond indices, earlier this year said the development increased the possibility of Chinese bonds being included in their benchmarks.
However, some foreign investors have warned that a lack of reliable credit ratings for Chinese onshore bonds and fears over credit quality could prove a hurdle to inclusion.
Rating agency S&P Global says the credit quality of about 240 Chinese companies it rates is deteriorating more quickly than at any time since 2009. (Reporting by Michelle Price; Editing by Richard Borsuk)