China issued new rules making it easier for big international investors to access its $5.7 trillion interbank bond market, a step forward toward opening its capital market as it seeks to promote the yuan as a reserve currency.
Foreign central banks, sovereign wealth funds and global financial organizations will no longer need pre-approval to trade bonds, interest-rate swaps and conduct repurchase agreements, the People’s Bank of China said in a statement Tuesday. Instead, they must only fill in a one-page registration form and can decide how much they can invest, the PBOC said.
While China’s government has taken unprecedented steps to halt a $3.8 trillion stock rout in the past month, policy makers are continuing efforts to promote global use of the yuan to support its case for inclusion in the International Monetary Fund basket of reserve currencies. Winning inclusion in the IMF’s so-called special drawing rights basket, or SDR, is a top priority for China’s leadership this year and has been spearheaded by People’s Bank of China Governor Zhou Xiaochuan.
“This is a big step towards China reaching its goal of including the yuan in the SDR basket,” David Loevinger, an analyst at fund manager TCW Group Inc. and a former U.S. Treasury Department senior coordinator, said by e-mail Tuesday. “This move highlights that while recent market volatility may slow China’s march towards a more open capital account, it didn’t stop or reverse it. The consensus among China’s leaders to get the yuan included remains intact.”
The IMF will conduct a review in November on whether to add the Chinese currency to its SDR basket, and 70 percent of votes are likely required to approve the yuan’s inclusion, an official at the organization said in June.
Tuesday’s announcement will have a limited impact on the domestic bond market because global investors’ exposure is still low, according to Loevinger.
China’s interbank bond market had 35.3 trillion yuan ($5.7 trillion) of outstanding bonds at the end of May, with daily trading volume at 356.5 billion yuan, according to data from the central bank. Only 2 percent of the bonds were in the hands of foreign institutions, including central banks.
The opening of China’s markets has the potential to boost global holdings of the nation’s onshore bonds to as much as $500 billion in five years, JPMorgan Chase & Co. estimates.
As long-term investors, foreign central banks and international institutions can help China’s local debt-swap plan, said Xie Yaxuan, an economist at China Merchants Securities Co.
Local governments are set to issue 2.8 trillion yuan of bonds this year. The nation is considering expanding a local debt-swap program for provinces and cities, which seeks to convert high-cost existing debt maturing this year into low-yielding municipal bonds, according to people familiar with the matter. The existing 2-trillion-yuan quota may be expanded to 3 trillion yuan, they said.
While more foreign buyers can have easy assess to the local market, Binqi Liu at HSBC Global Asset Management doesn’t expect big inflows.
“The yield might not be attractive enough for foreign investors considering the credit risk,” she said by e-mail. “Huge future supply is also a concern for foreign investors.”
The government’s recent interventions in the stock market generated fresh concerns that the nation isn’t committed to market-oriented changes, said Mark Williams, an economist at Capital Economics Ltd. in London, who formerly advised the U.K. Treasury on China.
“To encourage people to hold RMB assets, Chinese policy makers need to convince people that Chinese markets will be managed in a stable and sensible manner -- obviously policies for the equity market in the last few weeks have undermined that belief,” Williams said. “They are opening up capital controls in this move, but clearly they can change their mind and go backwards tomorrow.”
— With assistance by Helen Sun, and Belinda Cao