Ryuichi Urino
- China is now the 2nd-largest player in the FTSE WGBI, overtaking Japan as bond issuance and currency shifts reshape the market.
- The inclusion of Chinese bonds in the FTSE WGBI marks a major shift, offering more diversified options for global investors.
- Higher forecast net issuance means the market weights of both Japan and China in the WGBI should increase.
In March 2021, FTSE Russell announced a phased inclusion of Chinese government bonds (CGBs) in our flagship World Government Bond Index (WGBI) over the course of 36 months, starting November 2021.
The gradual inclusion was completed in the October 2024 FTSE WGBI index profile and all CGBs that meet the inclusion criteria will be included in the index from now on.
Below, we explain how recent issuance trends and currency market movements have made China the second-largest market in the WGBI.
How China grew to become the second-largest WGBI market
When China’s inclusion in the WGBI was announced in March 2021, the total market capitalisation of Chinese government bonds was approximately 9 trillion RMB, represented by 47 bonds. Assuming full index inclusion of CGBs at the time, China would have represented around 5.25% of the WGBI, making it the sixth-largest market in the index (after the United States, Japan, France, Italy, and Germany).
Now, China has risen to second place in the WGBI by size, reflecting two market trends: a sharp growth in issuance of Chinese government bonds; and relative currency movements (in particular, the depreciation of the Japanese yen).
When China’s WGBI phase-in concluded in October 2024, the total market capitalisation of the Chinese government bonds included in the index had risen to RMB 21.2 trillion (US$3.03 billion), represented by 81 bonds—over double the market size recorded just three years earlier.
Meanwhile, the market capitalisation of Japanese government bonds (JGBs), when measured in US dollar terms, had decreased significantly due to the depreciation of the yen over the last decade.
The US dollar was worth less than 80 yen in 2012 but breached the 160 yen level in June 2024. The yen then rallied sharply to the 140s following a currency market intervention by Japan’s Ministry of Finance.
However, Japanese political turmoil and a slower-than-expected forecast reduction in the interest rate differential between the yen and the dollar have pushed the yen above the 150 level again.
As a result of these trends, on October 14, 2024 the weight of Chinese government bonds in the WGBI surpassed the weight of Japanese government bonds (JGBs) for the first time, making China the second-largest market in the index.
Due to temporary fluctuations in the exchange rate, China’s second place was short-lived but by late October, the Japanese yen had weakened again and China had re-established its second place in the index by market size: as at the November 2024 FTSE WGBI index profile, the weightings of Japan and China were 10.12% and 10.17%, respectively.
It’s worth adding that FTSE Russell calculates the market capitalisation of JGBs by deducting the purchases by the Ministry of Finance and the holdings by the Bank of Japan from the outstanding totals of JGBs in issue.
During recent years, since the Bank of Japan’s holdings of JGBs have increased steadily, the outstanding amount recorded in the WGBI has only increased slightly in yen terms, despite the massive overall issuance of bonds.
Meanwhile, it has been reported that China will keep increasing its issuance of government bonds to stimulate the economy. At the same time, the Bank of Japan has also announced a reduction in the amount of government bonds it will purchase, and its holdings are expected to shrink by 7 to 8% by March 2026, which means that the amount of JGBs in market circulation will rise.
In summary, the market weights of both Japan and China in the WGBI are likely to increase. From the perspective of global investors, this should result in a somewhat more diversified overall index allocation, by comparison with a portfolio concentrated in US Treasuries.
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