PBOC Paper Calls for Further Opening Up of China's Bond Market

  • Recommends developing derivatives, inflation-linked products
  • Frequency of sovereign debt sales should be increased: paper

China should open its bond market to more foreign investment and develop derivatives and inflation-linked products to improve the transmission of monetary policy, according to a central bank working paper.

The government needs to consider increasing the quota given to Qualified Foreign Institutional Investors and relaxing controls to allow more overseas institutions to enter the interbank debt market in order to boost trading, wrote researchers led by Ma Jun, chief economist at the People’s Bank of China’s research bureau. The frequency of short-term sovereign note sales should be increased, according to the paper.

China removed a ceiling on deposit rates in October, the last step in liberalizing interest-rate controls. The PBOC is now moving toward adopting short-term money-market rates as the new benchmarks and letting the market transmit these into longer-term borrowing costs. It changed the frequency of open-market operations to daily from twice-weekly in its latest attempt to keep money rates stable.

“We believe that the relatively weaker interest-rate transmission in China versus some other countries has to do with the issuance structure of treasuries, market access restrictions for investors, under-development of the derivatives market, and the pricing behavior of commercial banks,” the researchers wrote in the paper. The transmission of short-term rate changes to medium- and long-term yields in China is about 25 percent weaker than in other major countries, they said.

The working paper also suggests improving the market-making mechanism in the secondary market, allowing commercial banks -- which hold more than 60 percent of outstanding sovereign bonds -- to participate in the futures market, and further developing interest-rate swaps.

— With assistance by Helen Sun

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