China opens up $10tr bond market in liberalisation step

China on Monday widened access to its $10 trillion bond market, which analysts said will boost Beijing's drive to internationalise the yuan and more deeply integrate its markets with the world financial system.

The new window for foreign investors was opened via Hong Kong, where "qualified investors" such as central banks, sovereign wealth funds and major financial institutions are now allowed to buy Chinese bonds -- the world's third-largest market after the United States and Japan.

Qualified investors include central banks, sovereign wealth funds, and other major financial institutions, according to the People's Bank of China (PBoC) and the Hong Kong Monetary Authority, who jointly announced the move on Sunday.

Trading got off to a tepid start, however, with analysts saying questions about the yuan's stability and fears over mounting Chinese debt levels will keep foreign enthusiasm in check.

The 10-year government debt yield had risen only slightly by late afternoon to 3.5732 percent, or 0.0076 points, according to Bloomberg. Bond yields rise inversely to their prices.

The People's Bank of China (PBoC) and the Hong Kong Monetary Authority jointly announced the step on Sunday amid weekend celebrations for the 20th anniversary of Britain's handover of Hong Kong to Beijing in 1997.

The PBoC said in a statement Monday that the new platform would "promote Hong Kong’s long-term prosperity and stability, and provide a more convenient investment channel for overseas investors".

"It will also steadily push forward the opening up of China’s financial market," it said.

The link-up was launched in Hong Kong by the city's new chief executive Carrie Lam, who hailed it as "another new chapter in the development of mutual capital markets access between the mainland and Hong Kong".

Foreign investors already have ways to access Chinese bonds but currently hold less than 1.5 percent of anything issued in China, according to estimates by Bloomberg.

China has been working to assimilate more with global markets, which allows access to increased foreign investment at a time of slowing domestic economic growth and helps internationalise its currency, which can increase a country's global monetary clout.

- Opening up -

The new platform mirrors previously established link-ups between the share markets of Hong Kong and mainland China that now allow foreign and Chinese investors to buy stocks in the each other's markets.

The connect scheme currently only allows foreign investors to buy Chinese bonds -- including government, corporate and central bank debt -- but is expected to become two-way eventually.

Analysts said the new opening was not expected to prompt a rush of foreign investment.

But it was hailed by some as a step toward Chinese debt being included in key global bond indices, which will encourage financial institutions to raise their investments in China bonds.

"The enhanced ease of investment under Bond Connect will attract more overseas funds, creating a more diversified investor base and further enhancing the market’s size and depth," said Helen Wong, Greater China chief executive for banking giant HSBC said.

"This will help pave the way for China bonds to be included in major global bond indices in the future."

Ratings agency Moody's called the move a "milestone" in yuan internationalisation.

China has for years faced foreign complaints about restricted access to its markets, but has recently made a series of liberalisation pledges.

Last month, leading index compiler MSCI said it would include Chinese shares in its global emerging-market indices, citing loosening restrictions on foreign ownership of Chinese stocks.

After years of runaway growth, China is grappling with slowing economic expansion, and has moved to stanch massive capital flight by Chinese funds seeking better returns overseas while trying to lure more foreign investment.