Goldman On WGBI Inclusion, Ups Inflow Exp.

Goldman Sachs note that "FTSE Russell confirmed Chinese Government Bonds will be included into the WGBI from 29 October 2021, and the inclusion will be phased in over a 36-month period. The extension of the implementation period reflects feedback during market consultation where FTSE determined that a more conservative implementation schedule would be appropriate, given the passive nature of the WGBI mandates. FTSE estimates that China's weight will be around 5.25%, based on the latest available data, which is broadly in line with our expectations. Note that FTSE recently announced on March 11, that it was lifting the minimum issue size of eligible securities from CNY 35bn to CNY 100bn. This means the smaller issue sizes (and illiquid bonds) would not be index eligible. We revise up our flow projections for 2021 to US$150-180bn (from US$120-140bn previously). While China's lower estimated weight (5.25% from 6.5%) and much longer scale-in period (of 36-months compared to the original 12-months) should lead to flatter inflow projections, we note that year-to-date inflows have been much stronger than expected with January registering inflows of US$33bn and February of US$13bn. We estimate that China's weight will be the sixth largest in the index, following the US, Japan, France, Italy and Germany. Meanwhile, China will have the third highest yield in the index after Mexico and Malaysia."