The opening of the bond market is potentially even more significant as it should help grow a critical financing market in China while raising demand for the Chinese currency and attracting capital back.
According to ANZ Research, “following the scheme to allow foreign central banks, supranational and sovereign wealth funds to invest in the interbank bond market last summer, China's (new) move to allow other foreign institutional investors access as well is a significant step in China's financial sector reforms”.
“Not only are more foreign investors given access but the process is being simplified and there will no longer be any quota limits.”
This comes on top of other actions the PBoC has been taking to stem capital outflows as well and reduce speculation in the currency, including cross border pooling restrictions and reserve requirement for deposits from offshore entities.
Looking at interest rates onshore and offshore for Chinese currency assets, known as CNH and CNY, FX rates are pretty close which suggests Chinese regulators have been largely successful in removing arbitrage from the CNY/CNH market.
Moreover, three foreign banks were banned from cross-border FX trading for three months which also sent a pretty strong message to the market.
Of course the liberalisation project remains delicate. China is a huge economy balancing a history of state control with an economy in transition and a desire to more closely integrate with liberalised global markets.
While China is yet to give up exchange rate control – particularly with recent capital outflow pressure - capital reform needs to continue as ultimately that will help deliver a more flexible exchange rate regime.
The bond market reform in particular should help balance inflows and outflows. It is estimated the move will see an estimated $US3 trillion flow into the country, helping to support the currency.
According to SWIFT, in January 2016, the RMB was the fifth most active currency for global payments by value and accounted for 2.45 per cent of global payments, a slight increase from 2.31 per cent in December 2015. Its activity share is higher than last month even though RMB payments decreased by 5.7 per cent in value, while at a global level, all currencies decreased by 11.2 per cent in value over the same period.