(Yicai Global) Sept. 3 -- The number of foreign institutions in China's inter-investment bank bond market has surged to over 1,000 this year from more than 400 in 2017 with the size of holdings swelling to some CNY1.7 trillion from CNY800 billion over the past 12 months, thereby demonstrating the country's progress in opening up.
Establishing a more open and transparent, safer, deeper and broader bond market is a key move for China's financial reform and opening up, said Pan Gongsheng, deputy governor of central bank, the People's Bank of China, and director of the State Administration of Foreign Exchange, in an exclusive interview with Yicai Global.
Yicai Global: How is the overall opening up of the Chinese bond market going?
Pan: In recent years, China has made positive progresses in developing and opening up the bond market. The balance of China's bond market reached CNY80.5 trillion as of the end of July. The country has the market depth and breadth in aspects such as bond varieties, means of exchange and infrastructure security.
PBOC is actively supporting international development institutions, foreign governments and international financial and non-financial enterprises to issue bonds in China while positively guiding foreign investors such as foreign central banks, financial institutions and investment product providers to invest in the bond market. The introduction of the Bond Connect program in July last year facilitates foreign investors' investments in the market without changing their trading habits. As of the end of July, more than 1,000 foreign institutions invested in China's inter-investment bank bond market and the holdings reached close to CNY1.7 trillion.
Yicai Global: What progress has China made in opening up its bond market?
Pan: China has further clarified the relevant tax arrangements. An executive meeting of the State Council decided in late August that the interest revenue of foreign investors on investing in bonds in China will be temporarily exempt from corporate income tax and value-added tax for three years.
The country has also introduced domestic depositary and settlement institutions allowing the 'delivery versus payment' function in late August, thereby fully implementing the Bond Connect and DvP settlement to further satisfy requirements on risk control and the regulation of foreign investors.
The Bond Connect has also officially rolled out pre-block trade allocations and will launch post-trade allocations to further facilitate moves by foreign asset managers and improve trade efficiency.
China has perfected a system for bond issuance for foreign institutions and will publish relevant methods shortly.
In addition, the Bond Connect has added another 10 market makers recently and as it already had 24 such players and relevant institutions, this significantly lowers the rate of transaction fees.
Yicai Global: How is the progress of the main global bond index providers on including the Chinese bond market? Does PBOC have any comment on this?
Pan: Among bond index providers with great influence in the international market, Bloomberg introduced two brand-new yuan-dominated fixed-income indexes combined with Chinese bonds and a global index in March 2017 and will include China's bond market in its flagship Bloom Barclays Index Aggregate from next April.
FTSE Russell's index announced plans to include the Chinese bond market in its FTSE Emerging Markets Government Bond Index, FTSE Asian Government Bond Index and FTSE Asia Pacific Government Bond Index in March 2017. The organization is carrying out evaluation and preparation work for their inclusion in the FTSE World Government Bond Index which tracks the largest amount of funds. JPMorgan Chase previously included Chinese bond market in its JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Index which consists of the GBI-EM Broad and GBI-EM Broad Diversified.
Including Chinese bond market in global main indexes can more accurately reflect the overall performance of the global bond market and strengthen the representation and attractiveness of those indexes, allowing global investors to more reasonably allocate bond assets. PBOC supports such inclusions.
Yicai Global: What measures will PBOC carry out to further open the bond market?
Pan: PBOC will join hands with relevant departments to perfect relevant systems and rules as well as boost infrastructure arrangement while supporting foreign rating agencies to enter the Chinese bond market in the rating business. PBOC will also encourage Chinese infrastructure players to strengthen the cooperation with more global mainstream e-trade platforms to provide a friendlier and more convenient investment environment for foreign institutions when investing in the Chinese bond market.
Editor: William Clegg