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China's huge bond market can be extra accessible to international traders over the subsequent 12 months

A Chinese national flag seen in front of the Oriental Pearl Tower in Shanghai on September 8, 2019.

Alex Tai | SOPA pictures | LightRocket via Getty Images

SINGAPORE – Major index provider FTSE Russell announced Thursday that it would add Chinese government bonds to its flagship government bond index from October next year – a development that will bring billions in inflows into China.

Inclusion – China's third entry into a major global bond index – comes at a time when investors are looking for yield in an environment with extremely low interest rates. Several investors estimated that at least $ 100 billion will flow into China after the bonds debut on the FTSE Russell Index.

"I think this is another major milestone in China's … internationalization of domestic financial markets," Ben Powell, chief investment strategist for the BlackRock Investment Institute for the Asia-Pacific region, told CNBC's Street Signs Asia on Friday.

He pointed out that 10-year Chinese government bonds are yielding around 3%, which is "a very high number in a global context."

Promote foreign participation

China's bond market, worth around $ 16 trillion, is the second largest in the world, but it is owned by international investors.

Pan Gongsheng, deputy governor of the People's Bank of China and director of state administration of foreign exchange, said in a statement that international investors held Chinese bonds worth 2.8 trillion yuan ($ 410.69 billion) in late August. That's less than 3% of the total Chinese bond market.

The Chinese authorities have significantly improved the infrastructure of the bond market to expand access to international investors.

Joining the FTSE World Government Bond Index could further increase the participation of foreign investors in the Chinese bond market, which will also boost the yuan, according to Hong Kong-based CSOP Asset Management. The company said the Chinese yuan will be the fourth largest currency in the index after the US dollar, the euro and the Japanese yen.

FTSE Russell said it would confirm the exact date that Chinese government bonds will be added to its index in March. Prior to the FTSE, Chinese government bonds were included in the Bloomberg Barclays Global Aggregate Index and the J.P. Morgan Government Bond Index-Emerging Markets included.

"The Chinese authorities have made major improvements to the bond market infrastructure to improve access to international investors," FTSE Russell said in a statement announcing its decision to move to China.

These improvements include improving liquidity in the bond market, additional counterparty selection in forex trading, and better post-trade settlement processes, the company added.

– CNBC's Eustance Huang contributed to this report.

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