The People’s Bank of China (PBoC) launched two new measures, allowing foreign central banks to participate in the nation’s interbank bond market and the exchange market, as part of efforts to promote renminbi internationalization and the opening up of the financial market.
The initiative allays the concern of international investors who feared that Beijing will become more conservative in opening-up moves following the high market volatility in the recent past.
From the perspective of bond issuance, the mainland interbank bond market has big potential to grow.
As the government will adopt proactive fiscal policies during the 13th Five-Year Plan period, authorities have raised the expected fiscal deficit rate in 2016 to 3 percent, from 2.3 percent in the previous year.
Meanwhile, China will also enlarge the size of local government bond swap to 15 trillion yuan. It is estimated that, by 2020, the Chinese bond market will be worth 100 trillion yuan, compared with the level of 48 trillion yuan in 2015.
In 2015, foreign investors held only 800 billion yuan worth of bonds in China, accounting for 1.6 percent of the total. With the opening up of the bond market, if the ratio surges to 5 percent, it would involve investment of 5 trillion yuan.
If the ratio climbs to 10 percent, it would involve investment of 10 trillion yuan.
Products included in the mainland interbank bond market are mainly treasuries, central bank bills, policy financial bonds, commercial banks’ bonds, corporate bonds, and local government bonds.
For foreign investors, the most attractive feature of RMB-denominated bonds is that they offer higher yield than that of the other currencies in the SDR basket.
Presently, total foreign reserves in the world amount to about US$11 trillion, of which 60 percent comprises assets denominated in the US dollar.
Foreign central banks, or equivalent entities, hold about 800 billion yuan in RMB-denominated assets, accounting for less than 1.5 percent. There’s still big room for them to increase their RMB positions.
As foreign investment in RMB assets rises, Hong Kong banks will get more opportunities to serve as intermediaries in asset allocation.
That will help deepen and expand the offshore renminbi market here.
In the future, Hong Kong’s financial industry should be able to provide one-stop services for foreign investors seeking to invest in the mainland bond market.
This article appeared in the Hong Kong Economic Journal on April 20.
Translation by Myssie You
[Chinese version 中文版]
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