JPM JP Morgan Chase and Co

By Frances Yoon and Shen Hong 

JPMorgan Chase & Co. plans to add Chinese government debt to its widely followed indexes, marking the latest stamp of foreign approval for the country's assets and one that is likely to draw yet more money from abroad.

The bank's decision comes more than three years after it began reviewing Chinese bonds for inclusion, and follows a similar move by Bloomberg LP, which started adding the country's debt to some of its benchmarks from April. Compilers of stock indexes, including MSCI Inc. and FTSE Russell, have also begun introducing Chinese shares to their gauges.

On Wednesday, JPMorgan said it would start including Chinese bonds in various indexes from Feb. 28, 2020. The biggest impact will be on its emerging-markets indexes, such as the flagship Government Bond Index-Emerging Markets Global Diversified index, which is tracked by investors managing an estimated $202 billion in funds.

The bank will add nine Chinese government bonds, with maturities of five to 10 years, to that index. China's presence in the index will increase by 1 percentage point a month over 10 months, to hit a maximum 10% weighting, putting it on par with Brazil. Chinese government bonds will play a much smaller role in the bank's world-wide benchmarks, such as the Global Aggregate Bond Index.

Developing a deep and well-functioning bond market is pivotal to Beijing's efforts to modernize how the world's second-largest economy is financed, and to reduce strain on an overstretched banking system. It is also central to China's ambition to turn the yuan into a global currency by encouraging central banks to hold more yuan debt in their reserves.

China's domestic bond market has more than quadrupled in size over the last decade, to 93.41 trillion yuan ($13.01 trillion), Wind data shows. About 56% of that consists of bonds from the central government and state-owned policy banks such as China Development Bank.

Foreign ownership of Chinese bonds has risen sharply, topping 2 trillion yuan in June, according to the People's Bank of China, though that still accounts for just 2.2% of the overall market. International investors hold a higher proportion of government and policy-bank debt, and have started to make their presence felt.

Gloria Kim, JPMorgan's global head of index research, said the inclusion of Chinese bonds reflected market demand given international investors can now buy and trade its bonds.

In 2016, Beijing granted foreign investors with trading accounts in China unprecedented access to its domestic bond market, scrapping a previous quota system. The following year, it launched a bond-trading link between mainland China and Hong Kong.

More recently, it has begun allowing global credit rating companies more freedom to operate onshore.

Many investors deem China's domestic ratings companies to be overly lenient with their ratings.

The International Monetary Fund has estimated that global index inclusions of Chinese assets could drive benchmark-driven portfolio inflows of as much as $450 billion, or as much as 4% of China's GDP, in the next two to three years.

Write to Frances Yoon at frances.yoon@wsj.com and Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

September 04, 2019 06:04 ET (10:04 GMT)

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