BOFIT Weekly Review 2015/41
Greater access to China’s bond and forex markets
Prime minister Li Keqiang last month announced forex trading by foreign central banks in the mainland China interbank markets could commence soon, though no exact schedule was set. In the following days, the central bank added that foreign central banks would also be allowed to engage in derivative trades on the interbank forex market. In July, access to China’s interbank bond markets was granted to central banks and international financial institutions.
Officials announced last month that they were easing issuance rules for “Panda” bonds (yuan-denominated bonds issued by a foreign agent in mainland China). Hong Kong branches of HSBC and the Bank of China will become the first issuers under the new rules as the PBoC approved issues of 1 billion yuan ($157 million) and 10 billion yuan, respectively. Panda bond issues have been available since 2010, but only a few were ever issued due to the strict rules. Interest of foreign banks and firms in Panda bonds has been hurt by restrictions on capital movements, accounting practices that depart from international standards and lengthy approvals.
Despite market turbulence, China has implemented a slew of financial market reforms this year. Forex market uncertainty, accelerated capital outflows and plunging stock markets, however, have also pushed officials to set new limits and tighten old ones. Still, there is no reason to assume the pace of reforms should slow or that there will be excessive delays in implementation of announced reforms.
The rising difficulty of supervising an increasingly complex economic system has added to reform pressures. The increasingly negative “net errors and omissions” term in the balance of payments indicates a rise in capital outflows circumventing official channels. Capital controls are also bypassed via the trade account. The leadership remains committed to reforms because they want the yuan to have a reserve currency status in addition to being a trading currency. Many recent reforms have been aimed at locking in the yuan’s acceptance into the IMF’s Special Drawing Rights (SDR) basket currency. The SDR issue will determine China’s operations on forex and financing markets in the near future.