In landmark move, China opens up interbank bond market

A view of the People's Bank Of China in Beijing, China.
A view of the People's Bank Of China in Beijing, China.PHOTO: EPA

SINGAPORE (REUTERS) - China has announced a landmark liberalisation of its domestic bond market only weeks after clamping down on the stock markets to halt a crash.

The People's Bank of China has granted full access to the 25 trillion yuan (S$5.49 trillion) interbank bond market to overseas central banks, sovereign wealth funds and international financial institutions.

The move indicates that the internationalisation of the renminbi, or yuan, remains on track despite the recent turmoil in the country's stock markets.

Jan Dehn, head of research at Ashmore, an emerging markets investment manager, said the measures would further encourage central banks to increase their exposure to the Chinese government bond market.

"The volatility in the Chinese markets is due to insufficient market depth, not fundamental issues," said Dehn."By continuing reforms, China is dealing with these teething problems in exactly the right way."

In addition to unrestricted access to the bond market, these foreign institutions will also be able to participate in interest rate swaps and repo transactions. The PBoC said such institutions should act as long-term investors and "conduct trading based on reasonable needs for preserving or increasing the value of their assets".

Nomura put the size of the onshore interbank bond market at 25 trillion yuan. It said that interbank transactions totaled 210 billion yuan per day on average in the first quarter, accounting for 90 per cent of total onshore bond market transactions.

"As of June 2015, foreign investors held 546 billion yuan of onshore bonds, which represents about 2.2 per cent of the onshore interbank bond market," wrote Nomura. "Even if we assume this proportion only increases to 5.0 per cent, it would represent net inflows of approximately 700 billion yuan.

"In addition to government bond markets, policy bank bonds should also benefit, as they collectively comprise 41 per cent of total bonds outstanding, while government bonds comprise only 34 per cent."

The broker said the move would cause the onshore-offshore spreads for both bonds and interest rates to narrow gradually in the medium term.

China's intervention in the stock market, and the risk that controls could be imposed on the bond market in the event of a crisis there, did not seem to deter foreign investors from holding yuan paper.

Ewen Cameron Watt, global chief investment strategist at Blackrock, said that he expected the yuan to be added later this year to the currency basket backing the International Monetary Fund's Special Drawing Rights, an international reserve currency, which would increase demand for bonds denominated in yuan.

"If you internationalise your currency, you have to have bonds to back it, and those bonds have to be freely tradable internationally," said Mr Watt.