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China is growing its power in global financial markets

Illustration of a globe with a chinese dragon wrapped around it
Illustration: Rebecca Zisser/Axios

Chinese onshore bonds, denominated in yuan, officially join the Bloomberg Barclay's Global Aggregate Index today, providing access to China's $13 trillion debt market, the world's third-largest after the U.S. and Japan.

By the numbers: The index is tracked by around $3 trillion of assets and will include debt securities issued by China's treasury or its 3 policy banks. The initial weighting will grow to 6% over a 20-month phase-in program, meaning about $180 billion of investor capital will flow to China.

Why it matters: This is a major milestone in China's development as a growing power in global financial markets.

  • "We're lucky that China is going slow in opening up because it would create enormous disruption," MSCI CEO Henry Fernandez said, noting the higher yields for Chinese government debt of around 3%. The index maker in February quadrupled the percentage of Chinese stock access in its EM indexes.

Today's inclusion will make the yuan the fourth-largest currency component in the globally tracked bond index behind the dollar, euro and yen. Right now foreign investors own just 2% of onshore bonds, according to Bloomberg.

Be smart: That's a big step considering the significant concerns about Chinese government involvement in the country's businesses and its currency. Further, its ratings agencies are seen as unreliable and sometimes untrustworthy.

  • "There are some risks associated but there are also some very good things happening, a lot of progress being made," Kate Jaquet, a portfolio manager at Seafarer Capital Partners, tells Axios. "That needs to be understood in a less biased way."

What's next? Chinese government debt also is on a watchlist of bonds to join FTSE Russell’s World Government Bond Index.

Ratings agencies Moody's and Fitch are working to launch ratings units in China to allay some investor concerns. S&P was granted approval in January.

  • "This is a market to watch and understand because whether people like it or not these bonds are coming," Jaquet says.

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