"Increased Interest in Won Due to China's Inclusion in the Global Sovereign Bond Index"

Daishin Securities Report

[Asia Economy Reporter Minji Lee] With the inclusion of Chinese government bonds in the World Government Bond Index (WGBI), it is anticipated that the domestic financial market could also experience positive effects. According to Daishin Securities on the 5th, the inclusion of Chinese government bonds in the WGBI could serve as a turning point that expands foreign investors' interest in Korean government bonds and the Korean won in the long term.

[Image source=Yonhap News]

Last month, FTSE Russell announced that Chinese government bonds would be included in the representative bond index WGBI starting from October next year. FTSE Russell stated that the inclusion reflects China's progress in market reforms and increased accessibility for global investors. Until last year, Chinese government bonds had failed to move from the watchlist to the inclusion target.

The FTSE Russell WGBI is one of the three major global bond indices. Chinese government bonds were included in the GAI in March 2018 and the JP Morgan GBI-EM index in September 2019. According to data from the International Financial Center, the weighting of Chinese bonds within the WGBI is expected to be around 5-6%, and based on an estimated index fund size of $2.5 trillion, an inflow of up to $150 billion is anticipated.

This inclusion of Chinese government bonds in the WGBI is expected to increase foreign investors' interest in Korean government bonds and the Korean won. Gong Dong-rak, a researcher at Daishin Securities, said, "If the inclusion expands the gateway to the Chinese bond market, attention should be paid to the potential trickle-down effect that could arise as the Korean won's role as a proxy for the yuan is emphasized." He added, "In a situation where the yuan's powerful influence on the Korean won in the foreign exchange market cannot be ignored, the bond market, which is recognized as an essential course for capital market opening, is also expected to have a significant ripple effect on the Korean financial market as it opens wider to foreigners."

With this inclusion, it is expected that the Korean government can move away from the stance of having withdrawn its intention to join the WGBI since 2010 and prepare for new inclusion. Previously, in February 2009, when the foreign currency funding market was severely shaken by the global financial crisis, Korea actively pursued the inclusion of won-denominated government bonds by exempting foreign investors from interest income tax and corporate tax on government bonds and Monetary Stabilization Bonds. However, in 2010, as the exchange rate sharply declined, the withholding tax system on foreign investors was reinstated, effectively withdrawing the intention to join.

Researcher Gong Dong-rak diagnosed, "Considering the rapid increase in government bond issuance over several years due to expanded government spending amid COVID-19, there is an urgent need to expand the stable demand base of foreign investors for won-denominated bonds." He added, "The inclusion of China in the WGBI has secured the justification and momentum to push for index inclusion."

This content was produced with the assistance of AI translation services.