Morgan Stanley Sees $80 Billion Inflow to Chinese Debt Next Year

(Bloomberg) -- China may see about $80 billion of inflows to its debt market next year when yuan-denominated bonds get added to a widely tracked index, according to Morgan Stanley.

Foreign demand, from both active and passive managers, for government bonds should help fund the current account deficit next year and stablilize the yuan, analysts Min Dai and Chun Him Cheung wrote in a note Wednesday. Bloomberg LP earlier this year put China's yuan-denominated bonds on track for a phased-in inclusion in the Bloomberg Barclays Global Aggregate Index in April. The market may see further $140 billion of inflows if two other bond indexes follow suit, the note said.

While foreign ownership remains very low, it will over the long term grow to more than $1 trillion from $240 billion currently if the yuan becomes more widely adopted, according to the note. China has been gradually opening up its capital markets to entice inflows, as its current account surplus narrowed and domestic fund outflows picked up amid depreciation in the yuan.

Foreign investors last month trimmed their holdings of Chinese bonds for the first time since February 2017, according to official data released this week. While the yuan stabilized and government debt yields dropped in November, the smallest premium over Treasuries in eight years may have prompted foreign selling.

Bloomberg LP, which owns the index that Morgan Stanley highlighted in its note, is the parent of Bloomberg News.

To contact Bloomberg News staff for this story: Claire Che in Beijing at yche16@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Kana Nishizawa, Sarah Wells

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With assistance from Editorial Board