Beijing woos global bond investors by making it easier to get money in and out of China

Foreign investors will also be allowed to invest in foreign exchange derivative products, such as by trading directly with Chinese counterparts

Rule changes may appeal to investors searching for higher yields, given the near-zero or negative interest rates available in developed economies

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Under a draft regulation up for public review, foreign investors would be able to open bond investment accounts at custodian banks in China, allowing firms to bring in money directly to buy domestic bonds. Photo: EPA-EFE

Published: 7:30pm, 22 Sep 2020Updated: 10:12pm, 22 Sep 2020

China says it will let foreign bond investors transfer money into and out of the country more freely, allowing them easier access to the onshore bond market, in Beijing’s latest move to deepen financial links with the outside world.

Foreign institutional investors such as central banks, investment banks, wealth-management firms and insurance companies will be allowed to repatriate a larger amount of funds into the currency of their original investment without restrictions, according to a draft regulation published by the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) on Monday.

The draft will be open for public feedback until October 20 and rule changes are expected to come into effect soon afterwards.

Under the new rules, a foreign investor will be able to open a bond investment account at a custodian bank in China, and this will allow firms to bring in money directly to buy domestic bonds. If the firm brings in US dollars, it will be able to repatriate funds in US dollars; and if it brings in yuan, it can repatriate yuan out of the country.

The only restriction is that it cannot bring in one currency and repatriate profits in another, thereby avoiding foreign exchange arbitrage. For investments in both yuan and foreign currencies, the amount of foreign currency being repatriated will be capped at 1.2 times its original investment in that currency, an upwards adjustment from 1.1 times previously.

The relaxation addresses one of the biggest problems that foreign firms now face in attempting to invest in China’s onshore financial markets: it is relatively easy to bring money in, but it is hard to get money out. By granting foreign institutions greater autonomy in handling bond investment flows, China is easing its strict controls over capital outflows, letting foreign investors access onshore bonds directly, along with existing indirect schemes such as the Bond Connect via Hong Kong or passive flows via international investment indices that include China bonds.

Beijing’s move comes at a time when the central government is taking a series of steps to open up its domestic financial markets to boost its financial links with the outside world amid Washington’s threats of financial sanctions against Chinese individuals and institutions. In addition, there is a risk that the role of Hong Kong as the financial hub linking China with the rest of the world will diminish in the future due to mistrust stemming from social unrest and the implementation of a new national security law in the city.