China’s Central Bank May Allow Further Foreign Investment in Local Markets

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Aug. 20 – The People’s Bank of China issued a new circular on Tuesday allowing overseas RMB settlement banks and other institutions to enter the domestic interbank bond market in a pilot program targeting increased foreign investment.

The circular also clarifies the specific ways in which overseas institutions can engage in bond investments in the interbank bond market. The new rule is to provide an investment channel for overseas institutions that hold RMB-denominated assets, along with the expansion of China’s RMB cross-border trade settlements, according to a statement posted on the People’s Bank of China web site.

At the same time, the new regulation contains specific guidelines on the operation modes, affiliated transactions, and market monitoring which is necessary, according to state-run Xinhua, “to prevent risks and ensure stable market operation.”

China’s qualified foreign institutional investor (QFII) program currently limits foreign investment in China’s capital markets. As of August 1, though, the securities regulator has given 97 overseas institutions including Goldman Sachs, JPMorgan Chase, and Nomura Group approval for investment in local-currency denominated stocks and bonds.

“The above move to remit funds back into the RMB interbank bond market comes alongside the expansion of RMB deposit taking by Hong Kong banks as trade and settlement programs widen,” analysts said in a report led by Sean Darby.

“Perhaps the ‘mini QFII’ facility and the pilot scheme allowing foreign institutions access to China’s RMB market will be seen as the beginning of a ‘big bang.’”

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