China liberalises interbank bond market for foreigners

The PBoC has introduced a registration system for official foreign investors in its interbank bond market and scrapped quotas and approvals. It is seen as an attempt to ease concerns over recent market interventions.
China liberalises interbank bond market for foreigners

China has revamped its interbank bond (IBB) market for foreign investors, in a bid to make it more accessible as part of its liberalisation drive.

The new rules will benefit the largest international institutions and are accompanied by an expanded fixed income investment scope for them.

It comes just days after the country’s reformist image was dealt a blow by a series of government interventions designed to prop up its collapsing stock markets.

The People’s Bank of China (PBoC) announced on Tuesday (July 14) that a registration system would replace an approval system for China’s IBB market for three types of foreign official asset owners: central banks, sovereign wealth funds and international financial institutions.

The timing of the announcement could be a response to the recent government intervention in the equity market, which raised concerns over the pace of economic liberalisation.

Investors will be allowed to trade cash bonds (government bonds, financial bonds and corporate bonds), bond repo and lending, and fixed income derivatives such as interest rate swaps and forwards, after pre-registering with the Chinese central bank. The change was effective from July 14. The registration form is available on the PBoC’s website.

The change entails the removal of the system of licence approvals and quota restrictions, allowing foreigners to invest in the China onshore bond market with freer flows and convertibility.

It is seen as part of China’s bid to liberalise its capital markets and internationalise the renminbi as a global reserve currency. In particular, authorities are keen to gain inclusion into the International Monetary Fund’s SDR (special drawing rights) basket, a decision on which will be made at the end of this year.

“The announcement signals the PBoC’s determination to attain basic convertibility of the capital account by the end of 2015,” noted Liu Ligang, Greater China economist at ANZ Research.

However, the timing has been a surprise to some observers as it came earlier than expected.

“There have been concerns about China’s commitment to financial liberalisation and reforms given what some perceive as a heavy-handed approach in managing the recent equity market volatilities,” noted Goldman Sachs’ senior China economist MK Tang in a research note. “We think the timing of the PBoC announcement may be partly targeted to mitigate such concerns and underline the government’s reform intention.”

Private foreign investors such as commercial banks, pension funds, insurers and asset managers will not be able to take advantage of the rules. Instead, they will need to access the onshore bond market through existing cross-border programmes - qualified foreign institutional investors (QFII) and its renminbi equivalent (RQFII).

The PBoC said that since foreign official investors were long-term buyers, they should trade onshore bonds based on a target of long-term asset value appreciation.

“The scheme indicates that China prefers to open up the interbank market selectively and gradually and is still wary of potential speculative activities by foreign entities,” noted Liu.

It comes after the PBoC’s May move to speed up approval of QFII foreign investors seeking access to the IBB market, and allow domestic hedge funds to participate in the IBB market last month.

In a research note by Beijing-based Minsheng Securities, the firm said it expected the interbank bond market’s registration system to expand to licensed investors under the QFII and RQFII schemes, while the investment scope may be expanded to government bond futures in the exchange market in the future.

China’s bond market was worth Rmb38.1 trillion ($6.1 trillion) at the end of May, with 93% of assets in the IBB market, according to the PBoC.

In a report in January this year, Standard Chartered said it expected foreign investors to increase their onshore bond holdings by Rmb300 billion in 2015, boosting total bond holdings in both the IBB and exchange markets to Rmb972 billion, up from 672 billion at the end of 2014.

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