January 23, 2022

Japan puts pressure on FTSE Russell over China’s inclusion in bond index

The Importance of China’s Inclusion in FTSE Russell

Japan puts pressure on FTSE Russell over China's inclusion in bond indexJapan puts pressure on FTSE Russell over China’s inclusion in bond index

FTSE Russell Faces Japanese Resistance Over Plan To Include China In The Bond Index.

Index provider FTSE Russell is facing resistance from some Japanese players, including the country‘s largest pension fund, to include China in its World Government Bond Index (WGBI), one of the most widely used global bond indicators..

Most of the concerns expressed by Japanese investors are related to technical aspects such as the lack of full convertibility of the RMB and some problems with bond liquidity and international settlements..

But market participants also believe that concerns are caused by the historical mistrust between the two Asian countries..

Japanese investors, including the giant State Pension Index Fund (GPIF), which needs to manage 172 trillion yen ($ 1.66 trillion), are by far the largest users of the index, putting the index provider in a quandary.

«Japanese investors seem to be looking inward and allergic to China, said Yoshikazu Kato, Research Fellow, Rakuten Securities Institute for Economic Research. – I suspect that it will be difficult for GPIF to invest in China when almost 90% of Japanese people are unfavorable to China».

The FTSE plans to begin listing China in the WGBI from October 2021 until approval in March 2021, and Japanese opposition is not expected to derail this plan..

Market participants estimate that Japanese investors make up between half and 80% of the funds that compare to the WGBI, although there is no reliable data on this topic..

Estimates for the total size of funds tracking the index range from 1.0–$ 1.5 trillion to over $ 2 trillion.

When FTSE Russell held an online meeting with Japanese investors on December 8 to explain its plan to incorporate into China, it met with strong opposition, two sources with knowledge of the matter said..

A GPIF spokesman raised concerns, including low liquidity for OTC issues, as well as capital controls, said a meeting participant who spoke to Reuters on condition of anonymity..

«The official asked questions that the FTSE could not answer, such as why this settlement issue was not resolved or what about these tax issues and so on. These were questions that almost sounded like an opinion», – said the panellist.

GPIF declined to comment on what its spokesman said during an online session.

FTSE Russell said it could not comment on its closed exchange of information with market participants.

GPIF uses FTSE indices, including WGBI, for the passively managed portion of its foreign bond investments.

For the actively managed portion, GPIF uses tests from other index providers except China.

Some fund managers believe the fund can do the same if China joins the WGBI.

Currently, GPIF has almost no shares of Chinese government bonds. He has just 1.3 billion yen ($ 12.54 million) in euro-denominated bonds issued by China.

A GPIF spokesman said the fund is currently excluding Chinese bonds due to China’s foreign investor rules.

«Since there is still some time left before switching on, we will think about how to deal with this. At the moment we have not made any decision yet», – he said.

Suppliers of the other two major bond indices – Bloomberg Barclays and J.P. Morgan – Already Added China After Beijing Reforms Its Debt Markets To Satisfy Foreign Investors.

Global investors welcomed the inclusion, as Chinese bonds offer higher yields on average over 3% compared to about 1% in the US, zero in Japan and negative in most European countries.

Even in Japan, many large banks and insurers dabbled in Chinese bonds. Since 2018, Japanese investors have been buying Chinese bonds every month.

«Japanese investors are never leaders. They tend to be followers. Their stance could change if they find everyone else is buying China», – believes Kato of Rakuten Research.