THE Chinese mainland’s determination to open up its $6tr domestic bond market to foreign investors will further help expand the renminbi’s global footprint — a hot pursuit of Beijing as it looks to bolster its currency’s standing in world financial markets.

The People’s Bank of China (PBOC) said earlier this month that Beijing would encourage overseas entities to issue renminbi-denominated bonds in the onshore market and allow more categories of foreign institutions to enter its interbank bond market with bigger investment quotas.

The move marked another step in mainland’s efforts to liberalise the capital account and internationalise its currency to match its economic might, and, some analysts say, eventually challenge the dominance of the US dollar in the global monetary system.

Beijing has greatly opened its equity market by launching a stock connect programme between Shanghai and Hong Kong in November, and is scheduled to roll out another one between Shenzhen and Hong Kong later this year.

Foreign investors still have very limited channels and quotas to tap the world’s third-biggest debt market at present, which had an outstanding amount of 36.8tr yuan ($5.9tr) by the end of May

However, foreign investors still have very limited channels and quotas to tap the world’s third-biggest debt market at present, which had an outstanding amount of 36.8tr yuan ($5.9tr) by the end of May.

Statistics from the PBOC showed that foreign investors held a total of 635bn yuan bonds on the mainland by the end of April, accounting for less than 2pc cent of the market. The percentage is much lower than South Korea’s 8pc and Taiwan’s 6pc.

In addition to the quota limit, overseas investors can only buy bonds and conduct bond repurchase agreement in the onshore market, and are largely shut out from other investment tools like interest rate swap and credit risk mitigation warrant.

“China is aiming to have the renminbi included in the International Monetary Fund’s SDR (special drawing right) basket and an inevitable trend is that the opening-up of its bond market will accelerate,” said Wan Tailei, head of International Cooperation Department at National Association of Financial Market Institutional Investors.

Freer access to the bond market is an important factor when the IMF evaluates the degree of liberalisation of mainland’s capital account.

Among the 40 items listed by IMF under the capital account, eight are directly or indirectly related with the bond market, Wan said.

Foreign investors’ interest in mainland bonds is increasing as they seek channels to diversify their portfolios and allocate more funds in renminbi assets, as markets wager that the Chinese currency is on its way to becoming a reserve currency.

Some of them who already hold renminbi assets were seen locking in profits from a huge stock rally on the mainland and switching to the bond market for less risky investment, but the access restrictions remain a challenge.

Their favorite bonds are those issued by the central government and mainland policy banks, taking up 35pc cent and 37pc, respectively, of the total investment from foreign investors, said Cui Wei, general manager of renminbi market department at China Foreign Exchange Trade System.

From the perspective of issuers, British Columbia, the first foreign government to sell a renminbi-denominated dim sum bond, is now eyeing the possibility of issuing a panda bond as its looks to attract more Asian investment to the Pacific Coast province. — ANN/Reuters

Published in Dawn, Economic & Business, June 22nd, 2015

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