China's central bank said yesterday that it has approved the first overseas institutional investor in the nation's 4.4 trillion yuan (US$530 billion) interbank bond market.

This marks a key step in the opening up of the nation's capital market, and follows liberalization at the beginning of this year which allowed international development organizations, such as the Asian Development Bank, to issue renminbi bonds in the local interbank bond market.

China allowed qualified foreign institutional investors (QFIIs) into its US$500 billion A-share market more than two years ago, but until now they have been barred from entering the interbank bond market.

The arrival of the US$1 billion ABF Pan-Asia Bond Index Fund (PAIF) is of great significance to China's interbank bond market in paving the way for more overseas institutional investors, officials with the People's Bank of China (PBOC) said.

The PAIF is part of the Asian Bond Fund 2 (ABF2) launched by the EMEAP (Executives' Meeting of East Asia and Pacific Central Banks) Group, which is comprised of 11 central banks and monetary authorities in the East Asia and Pacific region.

The EMEAP Group announced the completion of the initial US$1 billion funding of the PAIF, which will be domiciled in Singapore and seek a listing in Hong Kong, but said it will, in the second phase, be opened to investment from institutional investors and the public.

The PAIF, managed by State Street Global Advisors Singapore Limited, invests in sovereign and quasi-sovereign local currency-denominated bonds issued in the eight EMEAP markets including China, the financial authorities of which contributed the US$1 billion funding.

The EMEAP Group launched the Asian Bond Fund 1 in 2003 with US$1 billion from the foreign exchange reserves of the same eight members, which have been invested in sovereignty and quasi-sovereignty US dollar bonds issued by the eight members.

Shen Bingxi, deputy director-general of the PBOC's Financial Market Department, said the opening up of China's interbank bond market will accelerate as overseas institutional investors become more confident about the prospect of the market and apply for entrance.

"In the foreseeable future, there will be more overseas qualified institutional investors entering the interbank bond market, and the opening up of the market will speed up further," he told reporters.

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 an economic crisis.

China's banking system, plagued by massive non-performing loans, still accounts for more than 80 per cent of the funding supporting the rapid growth of the local economy.

The central bank promulgated a new regulation on Wednesday that governs the bond issuance of financial institutions in the interbank market, allowing financial firms affiliated to group companies to issue bonds for the first time.

The ABF2 also includes eight single-market funds, which have been initially funded with a combined US$1 billion from the eight members who will each invest in one of the eight EMEAP markets respectively.

The ABF China Bond Index Fund (China Fund), which will be invested in China's bond markets including both interbank and exchange markets, will soon be set up, PBOC officials said.

The China Fund, which will be managed by the China Asset Management Corporation Limited, has an initial investment equivalent to around 1 billion yuan (US$120 million), the manager said.

The manager said it will, in the second phase of the programme, launch an ABF China Exchange-Traded Fund on the basis of the China Fund, and list it on the Shanghai Stock Exchange. Bond portfolios in the China Bond will be converted into units of the ETF.

The ABF2 Funds represent low-cost and efficient vehicles for investing in local currency bonds, and are particularly conducive to the development of China's bond market by promoting product innovation and improving infrastructure of the market, PBOC officials said.

The iBoxx ABF family of indices, the benchmark indices which the nine ABF2 Funds will be closely tracking, was also launched yesterday by the International Index Company.

(China Daily)