A well-developed RMB bond market with a high level of foreign participation is an essential attribute that underpins RMB as an international reserve currency. The growth potential of foreign holdings of RMB bonds would be considerably large, given the size of China’s economy and the RMB bond market. However, due to the restrictions under the current market opening programmes for foreign investors, the degree of foreign participation in China’s bond market is significantly lower than those in the countries with international currencies and even some emerging markets. This reveals the needs to enhance market infrastructure, trading rules and financial products with innovative measures in order to further advance RMB internationalization.
At present, China runs three main programs that allow foreign investors to access the domestic bond market, namely the Qualified Foreign Institutional Investor (QFII) scheme, the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme and eligible institutions in the Mainland’s interbank bond market (PBOC Eligible-Institutions scheme)1. Although related regulations have been gradually relaxed, the rules on quota administration, account management, or fund remittance are still major hurdles in effective investment strategies and funds allocations of foreign participants. Moreover, some institutional features of the domestic market are of key concerns that need to be addressed in order to promote more active foreign participation. These include issues like market fragmentation, less diversified market structure, under-developed credit rating system, and potential credit risk.
Domestic bond market development has been one of the state policy priorities for both the Mainland capital market development and RMB internationalisation. To further promote foreign participation in China’s domestic bond market, the following potential improvements can be considered: (1) Further integrating trading platforms and foreign participation schemes; (2) Accelerating the pace of cross-border product innovation to bridge the offshore foreign exchange (FX) market strength with the domestic bond market; and (3) Linking up onshore and offshore bond markets, as the Bond Connect scheme jointly announced by the People’s Bank of China (PBOC) and Hong Kong Monetary Authority (HKMA), to diffuse international practices and standards to the domestic market. A cross-border Bond Connect platform will offer a welldeveloped financial infrastructure and market practices in line with international legal and regulatory standards. This would reduce regulatory burdens and offer a more convenient trading environment for both foreign participants and domestic investors. This measure could be regarded as part of a wider effort to further open China’s capital markets and to make RMB-denominated assets more accessible to foreign participants, and strengthen the role of Hong Kong as a gateway between the Mainland and international markets.
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