THE imminent arrival of a new group of investors in China’s domestic bonds is set to strengthen the hand of reform advocates in the world’s third-largest debt market.

With overseas holdings already at record levels, the April 1 inclusion of a slice of China’s near-US$13 trillion in onshore bonds in a key global index will usher in fund managers who use the benchmark to assemble their portfolios.

Strategists see US$100 billion or more flowing in this year and for years to come. That will make the foreign investor community an increasingly significant stakeholder in China’s financial system.

Foreigners are already making demands, including readily available hedging tools, more transparent and faster registration procedures and assurance they’ll be able to take their money out when they like. Their voices are set to become more important as their share of the domestic market climbs from little more than 2 percent today.

“As more people become part of the yuan asset market, it requires China both to reform and to improve its domestic regulatory structure to ensure the healthy development and efficient functioning of its financial market,” said Liu Linan, a greater China rates and foreign exchange strategist at Deutsche Bank AG in Hong Kong. It all helps in “upgrading domestic financial regulation,” she said.

The fresh impetus comes from the phased inclusion of Chinese sovereign bonds and debt sold by three key State-owned policy banks into the Bloomberg Barclays Global Aggregate Index, starting today. Up to now, inflows have been dominated by central banks and sovereign wealth funds.

Now private sector managers following the index will start joining in, though there are differences in terms of appetite.

“There remain constraints to full inclusion related to market structure concerns,” Vanguard Group Inc. said. The mutual fund giant plans a 0.2 percent to 0.5 percent allocation to Chinese bonds in its global and international fixed income portfolios. Bloomberg Barclays will boost them to 6 percent for the global index by November 2020.

Morgan Stanley sees as much as US$120 billion going into China’s government bond market annually from 2020 to 2030. Deutsche Bank’s projections suggest foreigners will own as much as a fifth of central government debt in five years. (SD-Agencies)