China Central Bank Says Committed to Opening Up Bond Market

Updated on
  • PBOC doesn’t give timeframe for liberalization of market
  • Nation’s bond market was thrown into turmoil this month

China's Grand Plan for Bond Markets

China’s central bank reaffirmed a commitment to opening up the nation’s bond market in the wake of a record selloff.

The People’s Bank of China and other departments will work to improve rules to give foreign investors easier access to the interbank bond market and create conditions for inclusion of yuan debt in global indexes, said Ma Jun, chief economist of the PBOC’s research bureau.

A combination of rising short-term funding costs and higher inflation contributed to an unprecedented rout in the bond market last week, with the 10-year yield surging 22 basis points on Dec. 15. Increased foreign buying of the nation’s debt would help counter capital outflows, while HSBC Holdings Plc has previously estimated that inclusion in major bond indexes could help draw as much as $150 billion to Chinese government debt.

“Since there’s a high demand for the U.S. dollar and pressure on the yuan onshore, the best thing to do other than to force people to keep their money in China is to attract yuan demand by, for instance, opening up equity and fixed-income markets," said James Yip, a Hong Kong-based money manager at Shenwan Hongyuan Asset Management (Asia) Ltd.

Measures such as opening the interbank bond market to overseas institutional investors can improve China’s balance of international payments and keep the yuan basically stable, Ma said in a written statement distributed to reporters at a briefing Thursday. He doesn’t have a direct policy-setting role at the central bank. 

While no timeframe is available, here are the four measures the PBOC plans to take:

  • PBOC to allow overseas institutional investors to hedge currency risk in China’s foreign-exchange derivatives market
  • PBOC to allow overseas institutional investors to hedge interest-rate risk in the interbank market by trading derivatives
  • PBOC will more clearly specify rules on remittance of investment and returns, as well as tax policies on investment returns and interest-rate income
  • PBOC will explore ways to cooperate on overseas-domestic market infrastructure and expand trading hours to give overseas institutional investors more access to the interbank bond market

China’s foreign currency reserves, the world’s largest, fell last month by the most since January after the yuan declined to an eight-year low. While authorities are reported to have begun tightening capital controls, a $50,000 limit on the amount that Chinese citizens are allowed to convert from yuan annually will reset at the start of the new year, potentially adding depreciation pressure on the currency.

In a paper published this year, Ma wrote that opening the bond market to more foreign investment and developing derivatives and inflation-linked products can improve the transmission of monetary policy. PBOC Deputy Governor Pan Gongsheng also said in June the nation would push for the entry of domestic notes in global measures such as those compiled by Citigroup Inc. and JPMorgan Chase & Co.

A total of 373 overseas institutional investors have entered China’s interbank bond market by October, and more will join in the future, Ma said Thursday.

— With assistance by Yinan Zhao, Justina Lee, Helen Sun, and Li Liu

(Updates to add analyst comment in fourth paragraph.)
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