China Gets New Link to Foreign Markets in Clearstream Bond Deal

  • Deutsche Boerse link gives investors access to Chinese bonds
  • Doubts about China's financial market integration have emerged

Foreigners will soon gain greater access to China’s $5 trillion interbank bond market.

Deutsche Boerse AG’s Clearstream unit will in the fourth quarter open a conduit to that market for qualified investors, according to people familiar with the plans who asked to not be named, citing confidentiality agreements. The People’s Bank of China said in February that most types of overseas financial institutions will no longer require quotas to invest in the interbank bond market, which accounts for the bulk of debt in the nation.

The agreement is part of China’s efforts to inject its currency into global commerce. That process accelerated last year when the International Monetary Fund said it will add the yuan to its basket of reserve currencies, giving it an international stamp of approval. But doubts about integration and the Chinese government’s willingness to relinquish control over its markets emerged as the nation’s equities plunged.

China is trying to increase its clout and reduce reliance on the U.S. dollar. Policy makers in Asia’s largest economy have been attempting to boost the use of its currency by broadening the range of investments available offshore. China is considering selling about 3 billion yuan ($464 million) of bonds in London, according to people familiar with the matter.

With the new agreement, Clearstream is poised to become the only international central securities depository with a direct link to China’s interbank bond market. ICSDs hold assets such as securities so that ownership can easily be transferred. The Deutsche Boerse unit has about 13.4 trillion euros ($15.2 trillion) in assets under custody, including 1.4 trillion euros for central banks.

The amount of bonds outstanding in China totaled 48.8 trillion yuan at the end of December, according to the PBOC. The interbank market totaled 35 trillion yuan at the end of January and foreigners held less than 2 percent of this, ChinaBond data show. China’s 10-year sovereign yield of 2.93 percent compares with 1.84 percent in the U.S., the world’s largest bond market, and minus 0.12 percent in second-ranked Japan.

Deutsche Boerse is betting that even if progress in connecting China’s financial system to the rest of the world slows, it’s still going to happen. Clearstream has provided access to China B-shares since 2001 via its link to the country, which is being expanded to include onshore bonds.

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