This week the People’s Bank of China announced that it would seek to open its bond market to foreign investors. The surprise statement was made via its website and it is a big move for China in the liberalising of its markets. The move may also help the government manage the weakening of its currency as an estimated USD$3 trillion of foreign investment is expected to flow into the market.
Presently the Chinese bond market only allows foreign investors to invest through a quota system that is largely made up of asset managers, insurance companies and financial institutions. Hedge funds or speculators are not eligible and have also been explicitly excluded under the proposed changes. Foreign central banks and sovereign wealth funds won access to Chinese bond markets last June.
China has been trying to stem huge outflows of capital that have driven down the yuan over the past year. It has spent upwards of USD$700 billion trying to defend its currency, driving down its foreign reserves sharply. Its currency and share markets have experienced extreme volatility as the authorities have attempted to implement various strategies to manage the yuan in an orderly fashion.
The proposed move will take time to implement but it is another step in the opening up of Chinese financial system. In November 2015, it was announced that China’s currency would be granted IMF reserve currency status, a move that has brought China closer to becoming a freely-traded currency.