China's central bank announced yesterday that non-financial institutions will now be able to trade bonds in the nation's 4.4 trillion yuan (US$530 billion) interbank bond market.
The loosening is the latest in a series of moves by the authorities to accelerate the development of the bond market, which is expected to play a bigger role in funding economic growth and reduce the economy's over-reliance on the banking system.
In a circular published on its website yesterday, the People's Bank of China (PBOC) allowed non-financial institutional investors to trade bonds with inter-bank bond market participants that have a liquidity provider status and can broker in settlement.
The non-financial institutional investors can also enter into reverse bond repurchase agreements with existing participants, which will enable them to provide short-term funding to other investors.
The inter-bank bond market is largely confined to financial institutions. Non-financial institutional investors could previously only trade in the market through other participants.
"This means they can now do it on their own," said Ma Junsheng, chief manager of the Financing Division at the Industrial and Commercial Bank of China.
"This is very important for the construction of the market," he said, adding that China's interbank bond market has a relatively small number of institutional investors.
Most institutional investors in the market are now banks, which typically have similar liquidity needs, making it necessary to bring in more players to diversify the market, Ma said.
Chinese authorities have taken a slew of measures this year to accelerate the development of its interbank bond market.
At the beginning of this year, some international development agencies, including the Asian Development Bank, were allowed to issue renminbi bonds in the local interbank market.
Last month, the central bank allowed more financial institutions, including financial firms affiliated to group companies, to issue bonds for the first time, and ushered in the market's first overseas institutional investor - the US$1 billion ABF Pan-Asia Bond Index Fund.
China is keen to accelerate the development of its bond market and reduce the economy's over-reliance on the banking system, which analysts say could amplify problems in the event of economic crisis.
China's banking system, burdened with massive non-performing loans, still accounts for more than 80 per cent of the funding that is supporting the rapid growth of the local economy.
While yesterday's move will accelerate the construction of the market by broadening the scope of investors, it may not bring in hefty amounts of fresh funds in the near term as too many of the non-financial institutional investors have ample short-term funds to invest in the interbank market, Ma said.