China is tweaking its foreign exchange rules to make it easier for overseas institutional investors to buy onshore bonds, as Beijing steps up efforts to offset financial decoupling from the United States.
The People’s Bank of China and the State Administration of Foreign Exchange on Wednesday issued a new draft regulation pledging to cut red tape and unify rules that covered different channels, such as the Bond Connect programme between the mainland and Hong Kong and the China Interbank Bond Market.
Foreign institutional investors will be allowed to directly invest in exchange-traded bond products, according to the draft that has been released for public feedback. They will also be able to access onshore hedging tools such as forwards and interest rate swaps.
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“This is set to enhance institutional arrangements for bond market opening up and facilitate the investment in yuan bond assets,” China’s central bank said. “It will encourage inflows of medium- and long-term overseas capital.”
Beijing has been intensifying efforts to woo overseas investment in Chinese securities – including from Wall Street – as Washington tries to sever financial links between the two countries.
US President Donald Trump in May directed the Federal Retirement Thrift Investment Board, which runs the retirement savings for federal employees, to halt plans to invest in Chinese stocks.
In response, Beijing is opening up its market to give foreign investors more ability to access China’s financial market. A day before the new draft rules were published, China’s National Interbank Funding Centre allowed overseas investors to trade with onshore market makers and made price quotes available on Bloomberg terminals.
Beijing is also opening the door for US financial institutions: Citigroup was granted a fund custody licence issued by the China Securities Regulatory Commission; JPMorgan has won approval for full control of its Chinese mutual fund joint venture for US$1 billion; and Vanguard, the world’s largest mutual fund manager, will move its Asia head office to Shanghai from Hong Kong.
The investment return in the Chinese market is attractive, given the prevailing pandemic overseas, interest rate gap and exchange rates
Meanwhile, the inclusion of Chinese bonds into global indices such as the Bloomberg Barclays Global Aggregate Index and JPMorgan Government Bond Index Emerging Markets has ensured a steady inflow of funds.
China has been reporting healthy investment flows thanks to its early economic recovery from the coronavirus pandemic and relatively higher yields offered by Chinese bonds.
Foreign holdings of yuan-denominated bonds, mainly government issued, rose 42.8 per cent from a year earlier to 2.46 trillion yuan (US$359.9 billion) at end-August, with the net purchase in August 117.8 billion yuan, data from China’s bond market operator showed.
“The investment return in the Chinese market is attractive, given the prevailing pandemic overseas, interest rate gap and exchange rates,” said Tan Yaling, head of the China Forex Investment Research Institute, a financial think-tank.
Tan said China should continue to open its financial market to foreign investors.
Chinese President Xi Jinping announced financial opening-up measures after the world’s two largest economies became embroiled in a trade war.
The trade frictions have since spilled over to technology, finance and national security, plunging bilateral relations to the worst point in more than four decades.
China is trying to strengthen bilateral links in finance and trade to prevent all-out decoupling.
Lou Jiwei, China’s former finance minister, said it was smart to allow overseas financial institutions to enter the country.
“China-US decoupling would be a lose-lose situation … Investing in each other is a good thing,” he told a meeting of the Global Asset Management Forum last week.
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This article US-China decoupling prompts Beijing to relax rules for foreign investors in onshore bond market first appeared on South China Morning Post