China recently opened itself to foreign investors by liberalising rules that regulate participation in its massive bond market.
Why China made such a move?
China’s bond market, the third largest, is estimated to be over $9 trillion in value and is expected to double in size over the next five years.
Yet foreign investors own less than 2% of the overall bond market.
This is due to China’s policy of raising significant barriers to the free entry and exit of capital.
In this situation, the new ‘Bond Connect scheme’ will allow large foreign investors to buy and sell mainland Chinese bonds through offshore accounts in Hong Kong.
Of late, China’s central bank has also been tightening monetary policy to squeeze out liquidity, which in turn, led bond yields in China to be higher than in many developed economies.
How it will help China?
The scheme will boost the borrowing potential of the Chinese sovereign as well as of corporations.
It will improve bond market liquidity by offering access to a wider pool of international capital.
The entry of more private capital into the Chinese economy can encourage investments in economic projects.
The inflow of foreign capital will help Beijing control the yuan.
And, after the inclusion of the yuan in the International Monetary Fund’s basket of currencies in 2016, the present bond reform gives a further boost to the Chinese currency.
In the long run, greater participation of foreign investors will increase the usage of the yuan, and thus aid Beijing’s efforts to internationalise the currency.
This in turn will also help bring more stability to China’s financial markets which is known for its high levels of volatility.
What is Bond market?
The bond market is where debt securities are issued and traded.
The bond market primarily includes government-issued securities and corporate debt securities, and it facilitates the transfer of capital from savers to the issuers or organizations that requires capital.
It is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities among themselves).
Although the stock market often commands more attention, the bond market is actually many times bigger and is vital to the ongoing operation of the public and private sectors.
