Moody's: Opening of China's interbank bond market is credit positive

Moody's Investors Service says that China's decision to open up its interbank bond market will benefit the development of bond markets generally on the Mainland and is also credit positive for foreign fund managers.

Moody's also views the regulatory relaxation -- announced by the People's Bank of China on 24 February -- as a significant step for financial reforms in China as it will provide more avenues for cross-border investments, which is in turn positive for capital market liberalization and RMB internationalization.

"In addition, the relaxation on regulations governing offshore participation will increase the liquidity, enlarge the scale and increase the diversity of the onshore market," says Nino Siu, a Moody's Assistant Vice President and Analyst. "And although we do not expect significant change in the near term, we believe this regulatory relaxation is positive for China's bond market in the long run."

Moody's conclusions were contained in a just-released report, "Asset Managers -- Global: FAQ on the Opening Up of China's Interbank Bond Market".

"In terms of specifics, more eligible foreign institutional investors will now be able to participate in China's interbank bond market, and these include commercial banks, insurance companies, securities companies, fund management companies, other asset management institutions, and medium to long-term investors, such as pension funds, charity funds, and donation funds," says Siu.

Moody's believes, as indicated, that China's bond market will benefit from this relaxation in the long run. Following the inclusion of the RMB in the IMF's SDR basket last year, many central banks and investors will seek to establish a RMB asset pool.

At end-2015, offshore investors only held approximately RMB603 billion in China's onshore bond market, indicating plenty of room to grow.

The Moody's report says that China's onshore bond market is attractive to foreign investment, with the total amount of outstanding bonds at RMB48.5 trillion (USD7.5 trillion) at end-2015, the third largest globally after the US and Japan.

There are three bond markets in China: the interbank bond market, the exchange bond market and the commercial bank counter market. The interbank bond market is a wholesale market and also a key bond market for institutional investors in China, accounting for more than 90% of primary issuance and trading in China.

In particular, 77% of public bond issuance by corporates in 2015 were medium-term notes (MTNs) and commercial paper (CPs) traded on the interbank bond market.