The Peoples Bank of China has today launched a pilot scheme to open up the Mainland interbank bond market to international trade, to promote the use of the Renminbi (CNY).
The trial allows CNY held offshore by Hong Kong, Macau and overseas banks who participate in CNY settlement to be invested in the bond market, where the majority of government bonds were previously off limits to international investors.
Seen as the first step to internationalizing the currency, the news will no doubt please speculators. Speculators say that, if it is to internationalize, China must deepen its bond market and broaden market participation.
On the face of it, it seems a small, cautious step but the implications for overseas investors are that they will be more willing to hold CNY funds offshore, where before they had few options, other than to use CNY receipts to buy goods in China.
As this money can be invested in bonds, it is a particularly attractive option for investors, who will be willing to hold onto CNY assets when risk appetite remains low and yields on other bonds remain particularly modest. 10 year US bonds, for example, are sticking around 2.6%.
Foreign central banks that have currency swap agreements with the Peoples Bank of China are also now able to invest CNY in CNY bonds, meaning that CNY can now be part of their FX reserves.
The general consensus is that China will become more active in policies to promote Chinese investment abroad, using CNY to balance pressure on the exchange rate. This is bad news perhaps for Hong Kong, the main offshore centre for CNY, although Hong Kong is not likely to admit that.
In a statement from the Hong Kong Monetary Authority, chief executive Norman Chan says: "The launch of the scheme has opened up a channel for CNY funds and financial institutions in Hong Kong to invest in the Mainland. This will further promote the development of CNY trade settlement in Hong Kong, and enhance the attractiveness of RMB offshore business in Hong Kong.
The Hong Kong Monetary Authority welcomes the new arrangement and will follow up with the Peoples Bank of China accordingly."
All in all, this is a first step to creating a better developed bond market but with the potential to shake up Chinese financial reform.
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