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Foreigners buying bonds onshore in China can now hedge the currency risk of doing so in a step forward for China’s efforts to attract international investment in its booming debt markets.

The approval of hedging tools including FX forwards, FX swaps, and currency swaps comes as policymakers are keen to broaden the mix of investors trading in China’s vast interbank bond markets, which are already the third largest in the world, with some Rmb64tn ($9.3tn) of debt outstanding – up 32 per cent on 2015 levels.

Last year Beijing surprised banks and investors by opening up access to the market under a sponsor-style scheme, where funds can still invest only under the auspices of an approved bank, but without requiring direct approval themselves.

Foreigners accounted for Rmb870bn of the interbank market, or 1.3 per cent, at the end of 2016. Interbank in this sense is something a misnomer, since the China interbank bond market, or CIBM as it is known, covers more than 90 per cent of all traded bonds.

One problem for foreigners had however been the cost of hedging and the ability to do it at all, with investors previously largely restricted to hedging in Hong Kong’s offshore renminbi market, which is far less liquid than onshore.

(Charts courtesy of Deutsche Bank.)

Read more:

Citi licensed to settle bonds in China interbank market (Feb 2017)

Bloomberg index to include China onshore markets (Jan 2017)

China’s debt market starts to stir foreign appetite (Sep 2016)

China’s bond market prepares to go global (March 2016)

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