China to Allow Wider Access to Bond Market

By Lingling Wei 

        BEIJING--China scrapped the quotas that limited investments from foreign central banks, sovereign-wealth funds and other big financial institutions in the country's $6.1 trillion bond market, in another step toward making the Chinese yuan an international currency.
        China's central bank announced Tuesday that effective immediately, certain foreign institutions--including central banks, sovereign-wealth funds and international financial institutions such as the World Bank--will have open access to the interbank debt market where the vast majority of China's government and corporate bonds are traded.
        Before the change, those foreign institutions had to apply to receive quotas from the central bank to invest in the debt market. Following the announcement, all they have to do is register with the People's Bank of China before they invest.
        "The relevant institutions can decide on their own how much to invest," the central bank said in a statement posted on its website. It also detailed the kinds of debt securities those institutions can invest in, including futures and other derivatives as well as bonds traded in the interbank market.
        The move comes as Beijing is gunning for the International Monetary Fund to declare the yuan an official reserve currency later this year on par with the U.S. dollar, the Japanese yen, the euro and the pound sterling. That status could help elevate China's role in global finance, even though the yuan, whose value is still tightly controlled by the government, is unlikely to pose a serious challenge to the dollar soon.
        Tuesday's action follows weeks of turmoil in China's stock markets, that at one point wiped out a third of market capitalization. A panicky, broad intervention by Beijing to stabilize share prices has raised questions among investors and analysts about the Chinese government's commitment to pressing ahead on promises to liberalize its financial markets.
        The move by the central bank "should help put those doubts to rest," an official close to the central bank said. "We're still moving ahead."
        Over the past year, the government has accelerated the freeing up of its long-cosseted capital markets to foreign investors by allowing them greater access to Chinese stocks and bonds. For instance, Chinese authorities late last year opened a stock-trading link between Shanghai and Hong Kong, which allows foreign investors to directly purchase stocks traded on the mainland. They plan to launch another such link between Shenzhen and Hong Kong in the next few months.
        The piecemeal moves combined are intended to liberalize cross-border investments and promote usage of the yuan without Beijing wholly giving up control.
        China in 2010 started to give quotas to foreign central banks and sovereign-wealth funds to buy Chinese bonds. Since then, some big-name institutions including the International Finance Corp., an arm of the World Bank, have invested in Chinese bonds as a way to diversify their holdings.
        Lured by China's rising economic status in the world, some foreign central banks, including those in Africa and Asia, have been slowly but gradually diversifying their currency reserves into bonds denominated in the yuan, also known as renminbi, or People's Currency. As of the end of April, foreign central banks held about $107.5 billion of their official reserves in the yuan, according to PBOC data.
        Enabling those big foreign institutions free access to Chinese bonds can "help turn renminbi into a reserve currency," Minsheng Securities Co., a large Chinese brokerage, said in a report late Tuesday.
        Still, other foreign investors such as mutual funds and individuals overseas have to apply for quotas with Chinese regulators to buy Chinese bonds. Holdings by foreigners now account for less than 2% of all Chinese bonds.
        Analysts at Minsheng Securities expect the Chinese government to move to relax those limits in the coming months.
        Write to Lingling Wei at lingling.wei@wsj.com
        (END) Dow Jones Newswires

        July 14, 2015 13:14 ET (17:14 GMT)

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