China Opens Biggest Bond Market to More Overseas Investors

China allowed more international investors to buy bonds on the nation’s largest debt market and purchase higher-yielding notes for the first time, as the world’s second-biggest economy develops its capital markets.

Participants in the Qualified Foreign Institutional Investor program are now allowed to buy bonds on the interbank market, the China Securities Regulatory Commission said in a July 27 statement on its website. Previously, they were restricted to exchange-listed debt, which is less than 2 percent of the interbank equivalent.

International investors will also now be permitted to buy bonds of small- and medium-sized companies through private placements, the regulator said. Such securities typically yield more than their counterparts listed on China’s stock exchanges.

The changes to the so-called QFII scheme, which allocates quotas to non-Chinese investors and was introduced in 2002, come after the government almost tripled allotments under the program in April to $80 billion from $30 billion.

“This is a very significant step,” Becky Liu, a Hong Kong-based credit strategist at HSBC Holdings Plc said in a phone interview. “The demand is likely to be for the top-tier names as they have the highest yield pick-up over offshore peers.”

The amount of money invested through the QFII is still too small to have an impact on China’s total bond market and half of the QFII quota has to be allocated into equities, Liu said.

The move builds on steps to open China’s fixed-income market to investment from outside the country. Authorities announced a program in 2010 to allow foreign central banks, clearing banks for cross-border yuan settlement in Hong Kong and Macau and other international lenders involved in trade settlement to invest in the interbank bond market.

There were 20.8 trillion yuan ($3.26 trillion) of the securities, which are traded over-the-counter among commercial lenders and other financial companies, outstanding as of the end of June, according to Chinabond. The figure includes debt issued by the central government, banks and companies, and compares with 379.5 billion yuan on the exchange-listed market.

China started sales of private placement bonds by small and medium-sized companies in June. Suzhou Huadong Coating Glass Co. sold 50 million yuan of two-year notes priced to yield 9.5 percent. Two-year government securities yield 2.36 percent.