Another three trillion yuan (HK$3.8 trillion) worth of reserve money is expected to flow into China’s bond market over the next three to five years and one in 10 central banks around the world is expected to hold yuan-denominated debt as Beijing opens up the debt market, according to a report by Deutsche Bank. The impact of regulatory change is so far limited, given the utilisation rate of the current quota allocated to foreign investment managers is low. But in the longer term, the world’s third biggest debt market could see a sharp increase of foreign investor participation, Deutsche Bank strategist Linan Liu says. On July 14, China’s central bank removed the investment quota requirement on foreign central banks, supranational financial institutions and sovereign wealth funds. Meanwhile, the lengthy application process has been discarded and a foreign reserve manager need only submit a filing of their investment plans to the People’s Bank of China. Foreign reserve managers can trade all fixed-income products available in the interbank bond market including cash bonds, repurchase agreements, bond borrowing and lending, bond forwards, and interest rate swaps. The only product currently not available is bond futures, which trade in China’s Financial Futures Exchange. The onshore market is estimated at about 35.3 trillion yuan as of the end of May, the central bank’s latest data said, with government bonds accounting for about 30 per cent of the total outstanding. “We understand about 600 billion yuan worth of quota has been granted to foreign monetary authorities, although actual investment is around 60 per cent of the approved quota. In other words, the current quota is non-binding, which reflects the near-term practical constraints such as the time it takes to grow the market knowledge, the liquidity condition in the market relative to reserve demand, etc,” Liu said in a note to clients. However, in the longer term, foreign reserve managers are expected to potentially hold up to 5 per cent of China’s domestic bond market over the next three to five years, Liu said. “To meet foreigners’ investment demand over the longer term, we expect China to grow the domestic debt market both in terms of the size, the depth and the liquidity of both cash products and derivatives products market,” Liu said. For instance, Beijing could grow more asset classes, such as the mortgage-backed and asset-backed securities market, municipal bond market, money market instruments, and corporate debt among others. In a separate note, rating agency Fitch expects the opening up to aid the Ministry of Finance’s local government debt-for-bonds swap programme aimed at lowering their financing costs by converting high-cost debt into municipal bonds. “The scale of the debt swap is such that demand from onshore investors may not be sufficient to meet the substantial increase in government bond supply,” said Fitch analyst Saifeng Mao. The ministry has announced two trillion yuan worth of swaps this year and Mao expects another one trillion yuan to be completed by the end of this year.