China removes bond quotas for foreign institutions

The People's Bank of China has taken another step towards liberalising its capital markets, in a move it says will help meet demand for mainland fixed income assets.
China removes bond quotas for foreign institutions

China has further liberalised its interbank bond (IBB) market to meet rising investment demand from foreign investors, despite substantial outflows from mainland stocks and a slowing domestic economy putting pressure on the renminbi.

The People’s Bank of China (PBoC) said yesterday (February 24) it would remove the investment quota system for commercial banks, insurance companies, securities firms and asset managers. This means eligible investors will not need to apply for a quota or licence. 

All institutions based in Hong Kong, Macau and Taiwan, and all members of the qualified foreign institutional investor (QFII) and renminbi-QFII schemes, will be eligible. 

The central bank had already removed the restriction in July for central banks, sovereign wealth fund and supranational/quasi-government institutions.

Yesterday’s move came two days' ahead of the G20 ministers’ meeting, which will take place in Shanghai tomorrow (February 26).

“This could benefit any manager that already has experience of trading Chinese fixed income, as they will not need to apply for the licence or quota,” noted Stephen Baron, deputy director of strategic solutions at Shanghai-based Z-Ben Advisors. Chinese fixed income is an asset class that is under-serviced by fund managers globally, he added. 

The PBoC said it encouraged participation by medium- and long-term overseas investors, including eligible institutions’ investment products, pensions, charities and endowments.

Global demand for renminbi assets rose after the currency secured reserve-currency status as part of the International Monetary Fund’s special drawing rights (SDR) basket, said the central bank. 

China’s onshore bond market stood at Rmb46.8 trillion ($7.16 trillion) as of November last year, having grown 30% from Rmb36 trillion at end-2014, according to data provider Wind.

Around 93% of mainland bonds are registered and traded in the IBB market, and 252 foreign institutional investors were allowed to participate as of August.

Chinese government bond prices were tipped to rally substantially this year due to the PBoC's easing polices and their relatively high yields. The 10-year mainland government bond yield was 2.867% as of yesterday's close, as against equivalent yields in Japan of -0.036% and Germany of (0.171%). 

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