Yuan Forwards Gain on Bets Bond Opening to Lure Capital Inflows

  • Foreign institutions get free access to interbank debt market
  • Move will be positive for yuan in medium term, Mizuho says

Yuan forwards rose for the first time in three days on speculation China’s opening up of its bond market to more foreign investment will offset an unprecedented exodus of funds.

Most types of overseas financial institutions will have unlimited access to the interbank debt market, the People’s Bank of China said in a statement on Wednesday. Commercial lenders, insurance companies, securities firms and asset managers were included on a list of those eligible and the authority said it also hopes to attract long-term investors such as pension funds and charities. Previously, access to the market was restricted by quotas.

"The policy facilitates capital inflows to the onshore market and will be positive to the yuan in the medium term," said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. The immediate impact on the yuan will be limited as the market remains cautious due to the slowing economy and foreign-exchange risks, he said.

Twelve-month non-deliverable forwards climbed 0.09 percent to 6.7820 a dollar as of 4:48 p.m. in Hong Kong, data compiled by Bloomberg show. The onshore yuan was steady at 6.5339 in Shanghai, according to China Foreign Exchange Trade System prices, after the central bank weakened the daily fixing by 0.02 percent to 6.5318. The offshore yuan fell 0.07 percent to 6.5399.

Administrative Measures

The relaxation represents a continuation of the opening of the onshore capital market and and may also be interpreted as part of China’s efforts to slow depreciation in the yuan, Frances Cheung, the Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA, wrote in a note Thursday.

Outflows from China increased to $1 trillion last year, according to estimates from Bloomberg Intelligence. That’s more than seven times the amount of cash that left in 2014. The nation has increasingly been resorting to administrative measures since January to stem the exodus, including increasing scrutiny of outbound fund transfers and curbs that tightened the offshore supply of yuan to stifle short-selling.

Foreign investors will likely remain worried about China’s capital controls, recent changes in policies and possible further declines in the yuan, which will limit their interest in the currency in the near term, Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co., wrote in a note Wednesday.

— With assistance by Tian Chen

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