China opens exchange bond markets to overseas investors

China will allow foreign institutional investors to trade bonds on its smaller exchange market in its latest step to attract more capital inflows by opening its financial markets, after a record sell-off of Chinese holdings by foreign investors.

Qualified foreign institutional investors, which can include central banks, sovereign funds, commercial banks and pension funds, will be allowed to invest in bonds on the exchange market, the People's Bank of China said in a statement published on its website. The move would "help expand capital inflows to China," it added.

Financial institutions can trade bonds and invest in derivatives as well as other instruments allowed by the central bank and China Securities Regulatory Commission, starting June 30, as China seeks to widen international participation in its 138.2 trillion yuan ($20.6 trillion) bond market, according to the PBOC statement.

In a separate move that could also boost financial flows to China, the CSRC, the country's top securities regulator, and Hong Kong's Securities and Futures Commission agreed in principal to include exchange-traded funds in a program connecting stock markets in the Chinese mainland and Hong Kong, the regulators announced in a joint statement. Preparation work would take two months, it added.

Global funds sold record amounts of Chinese sovereign debt in February and March as their yield premium over Treasuries collapsed and money managers fretted about a supply surge. Foreign investors have been alarmed by Beijing's close ties with Moscow following tough sanctions on Russia over invasion of Ukraine, and China's strict zero-COVID policy that has led to widespread lockdowns since March.

Concerns about China's economy, which contracted in April, have weakened China's currency. The offshore yuan fell 1.5% against the dollar last week, its biggest weekly drop since 2020. It has strengthened slightly since on news of lockdown easing in Shanghai.

Chinese bonds are traded in two markets in China. Foreign investors have been allowed since 2016 to invest in the country's interbank bond market, which accounts for 86% of the China's total domestic bonds, while the remainder is traded in the exchange market, according to a report last year by the International Capital Market Association and China's Association of Financial Market Institutional Investors.

Data from Chinabond released earlier this month showed foreign investors offloaded 42 billion yuan of Chinese government bonds in April. While the outflows narrowed from March, it marked a third straight month of selling by overseas funds. That was the longest string of monthly sell-offs since 2015.

The exchange market features some kind of assets such as enterprise asset-backed securities that aren't traded on the interbank market, the report added. China's securities regulator plays the major role in regulating the exchange market, while the interbank market is mainly regulated by the PBOC.

Chinese Premier Li Keqiang's plea this week for officials to move decisively to prevent the economy from backsliding and the nation's grim economic data highlight the risks the world's second-largest economy is facing amid stringent COVID-19 lockdowns, a property credit crisis and waning exports.