China’s determination to open up its $6tn domestic bond market to foreign
investors will further help expand the yuan’s global footprint – a hot pursuit of Beijing as it looks to bolster its currency’s standing in world financial markets.

Reuters/Hong Kong


China’s determination to open up its $6tn domestic bond market to foreign investors will further help expand the yuan’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 yuan-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 China’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 scheme between Shanghai and Hong Kong in November, and is scheduled to roll out another one between Shenzhen and Hong Kong later this year.
However, foreign investors still have very limited channels and quotas to tap the world’s third-biggest debt market at present, which has an outstanding amount of 36.8tn yuan ($5.93tn) by the end of May.
Statistics from the PBoC showed that foreign investors held a total of 635bn yuan bonds in China by the end of April, accounting for less than 2% of the market. The percentage is much lower than South Korea’s 8% and Taiwan’s 6%.
In addition to the quota limit, overseas investors can only buy bonds and conduct bond repurchase agreement (repo) in the onshore market, and are largely shut out from other investment tools like interest rate swap (IRS) and credit risk mitigation warrant (CRMW). “China is aiming to have the yuan included in the IMF’s SDR 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 (NAFMII).
Freer access to the bond market is an important factor when the International Monetary Fund (IMF) evaluates the degree of liberalisation of China’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 Chinese bonds is increasing as they seek channels to diversify their portfolios and allocate more funds in yuan assets, as markets wager that the Chinese currency is on its way to becoming a reserve currency.
Some of them who already hold yuan assets were seen locking in profits from a huge stock rally in China and switching to the bond market for less risky investment, but the access restrictions remain a challenge. Their favourite bonds are those issued by Chinese government and policy banks, taking up 35% and 37%, respectively, of the total investment from foreign investors, said Cui Wei, general manager of RMB market department at China Foreign Exchange Trade System (CFETS).
From the perspective of issuers, British Columbia, the first foreign government to sell a yuan-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.
Meanwhile China will cooperate with the International Monetary Fund in an assessment of whether the yuan should be included in the fund’s currency basket, known as Special Drawing Rights, China’s foreign exchange regulator said on Wednesday.