China’s latest efforts to push the yuan higher and stave off any (additional) capital flight the Moody’s downgrade might have triggered have raised new questions about Beijing’s commitment to liberalizing markets.
Of course there’s no mystery here. China will liberalize its capital markets just like it depreciates its currency: on its own terms.
And while that may ultimately delay the process by which Chinese assets are incorporated into global benchmarks, the delays are probably just that – delays.
Because as the following charts shows, China is grossly under-represented relative to its global clout…
Size (Chinese equity/bond market the 2nd/3rd largest globally) remains the key justification for inclusion, as well as continued policy initiatives targeting improved accessibility for global investors, a reasonable valuation profile and low foreign ownership (from an investor’s standpoint), and policy incentives to attract capital inflows. That said, capital controls, the effectiveness of the trading and regulatory framework, and administrative issues are key obstacles. We see the forthcoming June inclusion for A-shares as likely (a 60% chance) although bond inclusions are more likely to materialize starting in 2018, with the JPM GBI EM index potentially kicking off the globalization process of China bonds, followed by Bloomberg Barclays Global Aggregate and Citi WGBI by 2019-2020