China expands access to $4.3 trillion interbank bond market

Shanghai/Beijing: China is opening its 26.31 trillion yuan ($4.3 trillion) interbank bond market to non-financial firms after tightening trading rules following a crackdown on illegal transactions.

Qualifying participants will require minimum net assets of 30 million yuan and use a separate trading platform to banks, brokerages and insurers, according to a 17 October statement posted on Monday on the website of the National Association of Financial Market Institutional Investors.

The amount of bonds outstanding in China doubled in the past five years to 28.27 trillion yuan, of which 93% was accounted for by the interbank market, ChinaBond data show.

China is giving the bond market a greater role in financing and pricing risk in the world’s second-largest economy. Wider investor participation may help lower companies’ borrowing costs and curb demand for shadow-banking products that regulators are seeking to clamp down on.

The authorities last year barred some non-financial firms from participating in the interbank bond market as part of a crackdown on misconduct.

“The re-opening to the non-financial institutions should have a positive market impact,” said Li Liuyang, chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd in Shanghai. “After the crackdown, the new rules will help attract more investors. The expansion of the demand side will lay the foundation to establishing more financing channels for companies as the authorities promote direct financing.”

The yield on one-year sovereign bonds declined by 87 basis points, or 0.87 percentage point, this year to 3.36% on 31 October, ChinaBond data show. Similar-maturity, top-rated corporate notes pay 4.27% while the People’s Bank of China (PBOC) benchmark deposit rate is 3%.

The yield on government securities due September 2024 dropped eight basis points, or 0.08 percentage point, on Monday to 3.72%, according to National Interbank Funding Center data. The decline, the biggest since 20 October, came after China’s statistics bureau reported on 1 November that October’s Purchasing Managers’ Index (PMI) for manufacturing came in at 50.8, less than the 51.2 estimated in a Bloomberg survey. PBOC provided about 200 billion yuan to some banks last month.

“Government bonds are seeing a strong rally because of weak economic data and after the PBOC’s fund injections,” Junyi Zuo, fixed-income analyst at Founder Securities, said in an interview, adding that the regulatory changes had little impact on today’s market moves.

China has been tightening regulation of its interbank bond market since opening it to qualified foreign institutional investors in 2011.

Last year, the central bank was said to have asked participants to examine trading histories as it cracked down on illegal transactions.

The Central Commission for Discipline Inspection of the Communist Party was investigating brokerages for possible bribery with a focus on bond underwriting, 21st Century Business Herald reported on 17 June. It didn’t give further details.

Market probes may lead to a slowdown in the issuance of corporate notes, China Chengxin International Credit Rating Co., a Moody’s Investors Service joint venture, said in August.

China’s bond sales totalled 4.74 trillion yuan in the first nine months of this year, up from 4.52 trillion yuan a year earlier, China Central Depository and Clearing Co. data show. Standard Chartered Plc estimated total debt accounted for 251% of the nation’s gross domestic product (GDP) as of June.

There were 7,105 interbank bond market members as of 31 October, of which 148 are non-financial institutions, according to data posted on the National Interbank Funding Center website.

“To allow non-financial companies to invest in the interbank bond market would help further increase market participants,” said Yang Feng, a bond analyst in Beijing at Citic Securities Co., the nation’s biggest brokerage. “To give them a separate platform to trade would also prevent any market manipulation or other irregularities.” Bloomberg

Steven Yang in Beijing and Judy Chen in Shanghai contributed to this story.