China allows foreign investors to hedge FX risks onshore
(28 February 2017 – Hong Kong) China has announced that it will ease rules on offshore institutional investors hedging currency risks in the domestic forex market.
The move aims to address a major hurdle that has deterred foreign investors from buying onshore renminbi-denominated bonds.
The State Administration of Foreign Exchange (SAFE) stated that foreign institutional investors can use forex derivatives tools in the onshore market to hedge currency risks arising from their bond investments in the interbank market.
Effective immediately, they can use forwards, FX swap, currency swap and options. The new rules do not apply to offshore central banks as they had already gained access to the onshore forex market via various channels.
Market participants welcomed the new rule as a positive step towards attracting more foreign investors to the interbank bond market, as it addresses one of the main concerns: the inability to hedge forex risk via the onshore forex forwards market.
The announcement followed that from Ma Jun, chief economist of the People's Bank of China, last week, which said that China was looking at various measures to improve the access of offshore investors to its bond market and pave the way for the inclusion of Chinese bonds in major global bond indexes.
In addition to foreign investors' participation in the onshore forex derivatives market, Ma Jun also said that the central bank was studying plans to extend the trading hours of the interbank bond market to ease access for offshore investors.
Major global indices have been weighing the decision to include Chinese onshore government bonds since May 2016, when the PBoC published detailed guidance that improved the access of foreign investors to the onshore bond market.
Under that guidance, the PBoC allows foreign investors to remit funds almost freely without lock-up periods and permits them to use some onshore hedging instruments beyond cash bonds.
By the end of last year, foreign investors held RMB 870 billion (A$167.6 billion) of onshore bonds, according to SAFE. That was about one percent of the total RMB 6.37 trillion onshore bond market.
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