Jose Garcia Zarate: Bloomberg has recently announced that renminbi-denominated Chinese government and policy bank bonds will be included in Barclays Bond indices from April 2019. The inclusion will take place in stages and once completed, the weight of China in the Barclays Global Aggregate Index, which is the benchmark of reference for the global bond market, will increase significantly from current 0.6%, which only accounts for offshore bonds, to around 6%.
Aside from the Global Ag, the main impact of the inclusion of Chinese bonds will be felt in local currency emerging market bond indices. In fact, China would become the largest component accounting for close to 40% of the market. However, it must be noted that there is a version of this index that applies a 10% cap to the weight of individual countries in order to ensure diversification.
This move by Bloomberg acknowledges that nowadays most investors find it hard to reconcile the idea of investing in international bond markets and particularly emerging markets and not include what has become the third largest bond market in the world after the U.S. and Japan.
The move also serves as a handy reminder that indices and by exchange the passive funds that track them are not immutable investment propositions. Quite a contrary, they can see significant mutations throughout time and so investors in passive funds should keep track of these changes to ensure that the indices continue to meet their investment goals and risk tolerance.
