NEW YORK/KUALA LUMPUR, Sept 26 (Reuters) - Index provider FTSE Russell said on Thursday it would retain China's onshore government bonds on a watch list for a possible upgrade that could allow Chinese debt entry to its widely tracked government bond index.
Malaysian bonds, which were on review for a downgrade that would have excluded them from the World Government Bond Index (WGBI), were also retained on the watch list.
Malaysia's bond market is the most foreign-owned in Asia, and the status-quo could weigh on the ringgit on Friday.
FTSE Russell will provide another update after an interim review in March, which would give the Malaysian central bank time to potentially explore more measures to enhance liquidity.
"FTSE Russell will continue to engage with market participants to understand the practical impact of recent initiatives announced by Bank Negara Malaysia to improve market liquidity and accessibility," it said, referring to the country's central bank.
Last month, Bank Negara Malaysia (BNM) announced additional measures to give more flexibility to foreign investors to trade in the ringgit, and for resident businesses to manage hedging of foreign currency risks, in an attempt to stay in the index.
BNM Governor Nor Shamsiah Mohamad Yunus said after its last policy meeting the central bank had a "very positive engagement" with FTSE Russell.
Analysts at Morgan Stanley said earlier this year that foreign investors had cut their Malaysian government bond holdings since late 2016, and that nearly $8 billion could leave Malaysia if it was dropped from the index. Malaysia represents 0.39% of the benchmark.
Foreign holdings in Malaysia's bond market were about $157 billion in July.
Malaysia's 10-year sovereign bond is the benchmark issue most widely tracked by foreign investors. (Reporting by Rodrigo Campos and Joseph Sipalan Editing by Rosalba O'Brien and Jacqueline Wong)