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Citi to include China bonds in its government bond indexes

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SHANGHAI (Reuters) – Citigroup Inc said on Tuesday it will include China’s onshore bonds in its emerging markets and regional indexes, marking another victory in Beijing’s efforts to woo foreign investors to its bond market to counter capital outflows. The U.S. bank unveiled two new government bond indexes, one of which will include China. But it denied it entry into the widely tracked World Government Bond Index (WGBI), which remains unchanged with 23 markets. Citi said China bonds would be included in its three government bond indexes – the Emerging Markets Government Bond Index (EMGBI), Asian Government Bond Index (AGBI) and the Asia Pacific Government Bond Index (APGBI). It has also introduced the WGBI-Extended index which would comprise 26 markets, adding China, South Korea, and Israel to the WGBI constituents. The announcement by Citi Fixed Income Indices came days after Bloomberg included China bonds in its global indexes offering, and could prompt other index publishers to follow suit. “It’s a way to avoid forcing people into the China market and yet gives them an option,” said Singapore-based Mirza Baig, BNP’s head of foreign exchange and interest rate strategy, referring to the decision to keep two sets of indexes – one excluding and another including China’s bond market. “Investors can get turned off if they are forced by index providers into newly opened markets which is why they are sensitive and slow moving.” Citi did not give a specific date for when China bonds would be added to its indexes. Citi said that it had been monitoring China’s eligibility since February 2016, when Beijing opened its interbank bond market to foreign participants, and had now decided to include China bonds in its indexes after an extensive review. “We are pleased to see regulatory changes that enable market access, allowing us to reflect and provide new investment opportunities,” Arom Pathammavong, global head of Citi Fixed Income Indices, said in an email statement. China has redoubled efforts to lure overseas investors and bump up bond market inflows after relaxing rules on foreign investment. Last week, China opened its forex derivative market to foreign investors, giving them a way to hedge foreign exchange exposure in the country’s bond market. Encouraging capital inflows is part of efforts by Beijing to protect the yuan, which fell 6.5 percent against the dollar last year, and staunch a slide in its foreign exchange reserves. Authorities in recent months have announced a flurry of measures that made it harder to move funds offshore. Some market watchers have argued the moves to tighten restrictions on outflows could dampen foreign investment in China, as companies fear they will have trouble repatriating their profits. At the end of 2016, foreigners held about 870 billion yuan of Chinese bonds, just 1.5 percent of China’s 56.3 trillion yuan ($8.16 trillion) interbank bond market. JPMorgan predicted last May that Chinese government bonds could receive at least $155 billion of investment flows should China’s market opening lead to their inclusion in various global indexes. (Reporting by Samuel Shen, John Ruwitch and Umesh Desai; Editing by Kim Coghill and Nick Macfie)

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