China Gives Greater Foreign Access to Domestic Bond Market

China has given approval for HSBC, Morgan Stanley and 30 other foreign institutions to invest in its US$5.9 trillion domestic bond market, according to the
Financial Times
.

The business daily says that the move represents a big step towards opening its capital markets to foreign investment. Although China has significantly expanded foreign access to its stock market in recent years, liberalisation of the domestic bond market – the world’s third-largest, behind the US and Japan – has been slower.

Economists have urged for restrictions on bond investment to be loosened if China wants international investors to store their savings in renminbi (RMB). Central banks, sovereign wealth funds, insurers and pension funds have portfolios heavily weighted towards fixed income.

The approvals also come as China’s slowing economy and falling domestic interest rates spur capital outflows, which expanding inbound bond investment could help hedge against.

In 2011 the People’s Bank of China (PBOC) issued rules allowing institutions that had already been approved to buy into domestic stock exchanges to apply for access to the interbank bond market, where more than 90% of all Chinese domestic bonds are traded.

Prior to the latest 32 approvals, 24 qualified foreign institutional investors (QFIIs), 86 offshore renminbi QFIIs (RQFIIs), and an unknown number of foreign central banks and RMB trade settlement banks had been previously approved.

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