China opens its bond markets to foreign investors

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/10

Late last month, the People’s Bank of China announced it was eliminating quotas imposed on foreign commercial banks, insurance companies, pension funds and asset management companies participating in China’s interbank bond markets. Foreign investor quotas were eliminated already last summer from central banks and state investment companies. Of the institutional investors, only foreign hedge funds’ investment to Chinese bond market remain limited by quotas. Market observers see the reform as a major step towards opening up of China’s financial markets.

Valued at about $7.3 trillion, China’s bond market is the world’s third largest after the US and Japan. The main bond issuers in China earlier were the state and various public sector entities. In recent years, however, financial and non-financial corporate bond issues have become commonplace. Trading in Chinese bonds focuses largely on the interbank market. Foreign investors currently account for less than 2 % of the market.

With interest rates in advanced economies generally low, Chinese debt securities offer higher yields that will tempt foreign investors to put their money in Chinese bonds. However, disconcerting trends in China’s economy have emerged and recently capital has been flowing out of the country. Media comments suggest that institutional investors are closely monitoring the situation and have assumed a cautious stance on China investment.

The opening up of bond markets to foreign entities is a natural step in advancing China’s domestic financial markets, deregulation of capital movements and internationalisation of the yuan. Moreover, the bond market deregulation seems timely in light of the net outflow of capital from China and devaluation pressures on the yuan.

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