When Chinese officials talk about market deregulation, most people think of stocks. The relaxation of controls is also occurring in the interbank bond market, that opaque, somewhat esoteric zone where banks and financial institutions trade assets.
In February, China sent out signals that it would provide easier assess to Chinese bonds for foreign investors on the interbank market, paving the way for the inclusion of Chinese debt in major global bond indices.
The interbank market accounts for nearly 95 percent of China's 63.8 trillion yuan (.29 trillion) bond market, which has doubled in volume in the last three years.
Ma Jun, chief economist of the People's Bank of China, said at a conference in Singapore last Thursday that the central bank is studying plans to extend the trading hours of the interbank bond market to provide better access for offshore buyers and to allow offshore investors to participate in the foreign-exchange derivatives market.
"The rules, when introduced, will reduce currency hedging costs for offshore investors and will be conducive for attracting foreign capital into China's bond market," Ma said, suggesting a possible tax cut on related bond trading and simplified procedures of foreign exchange.
Days after Ma's speech, State Administration of Foreign Exchange, country's foreign exchange regulator, issued rules on late Monday to allow foreign bond investors to use derivatives products such as swaps, forwards and options to guard against currency risk.
Ma's comments came after Chinese authorities issued new licenses to the China unit of Citigroup to trade, settle and provide custody for bond products, and to JPMorgan Chase & Co to underwrite corporate bonds in the interbank market.
China is likely to overtake Japan as the world's second-largest bond market in the next one or two years, said Tommy Xie, a Singapore-based economist at OCBC Bank. However, there is still a gap between a surging domestic bond market and relatively cautious foreign investors, he added.
At the end of 2016, foreign institutions held 850 billion yuan of Chinese bonds, or 1.3 percent of outstanding fixed-income assets, according to the China Central Depository & Clearing Co. The percentage has declined as the number of bonds being issued climbs.
"It has been seven years since China officially allowed eligible overseas financial institutions to become involved in the mainland bond market," Xie wrote in a report. "Foreign capital is willing to lay out funds for long-term investment, but the risks of foreign-exchange policy and liquidity concerns hinder their interest."
Market brokers, who talked on condition of anonymity, echoed the same mixed view on foreign involvement in the Chinese bond market.
"The major hesitation is how decisive they should be in expanding their balance sheets in mainland China," an analyst with CITIC Securities Co told Shanghai Daily. "With a tighter foreign-exchange policy ahead, they have to think about how easy it will be to repatriate money back to their own countries."