On September 7 the China foreign exchange trade system (CFETS) announced a clutch of 13 foreign financial institutions and investment firms to whom it was granting access to the China interbank bond market (CIBM).
The announcement was the latest in a long line of similar approvals, and also came in the wake of a recent additional upgrading of the access granted to central banks, sovereign wealth funds and supranational agencies on July 14.
Entities that get approved for the CIBM fall into three categories: licence holders within the Qualified Foreign Institutional Investors (QFII) scheme; licence holders of the renminbi-denominated equivalent, RQFII; and those that fall within another RMB-related scheme that includes foreign central banks, monetary authorities and offshore RMB clearing banks.
The pace of the opening-up of the CIBM has been steady and names from different regions have emerged at each stage. Take the recent list as an example: it included four names from Singapore, three from Taiwan, and two each from Canada and South Korea.
This is all well and good, but the truth is that genuine expansion is painfully slow. The investment quotas granted this week are all within the respective firms' existing allowances for QFII or RQFII.
The People's Bank of China (PBoC) did make an exception for foreign central banks, supranationals and sovereign wealth funds, by removing any quota restrictions for onshore interbank bond investment.
For sure, this was the right start, given that these institutions are playing a key role in internationalising the RMB worldwide as their holdings of RMB assets are helping to take it closer to becoming a reserve currency. The PBoC said in its July relaxation that these three classes of offshore investors should act as long-term investors and should invest based on need.
But this simply confirms that they are viewed as buy-and-hold, stable participants, mostly interested in rate products — not exactly the kinds of players that will transform a market.
Commercial banks, funds and insurance companies, more active in buying and trading credit products like financial and corporate bonds, make up the majority of the offshore investors in the CIBM. More than 200 firms have entered the market via their QFII or RQFII licence in combination with CIBM approval. But their investments are still capped by quotas.
Also frustrating is the length of time it takes for firms to finally obtain CIBM approval. Applicants must first seek a securities investment business licence through the China Securities Regulatory Commission (CSRC), and then an investment quota from the State Administration of Foreign Exchange (Safe). After these two steps, which may take as long as six months, the applicants can then apply for the CIBM investment licence from the PBoC. By the time they get the CIBM status, it might have taken them more than nine months.
Schroder Investment Management (Singapore) is one of the 13 firms with CIBM approval on the latest list released on September 7. The firm got its RQFII investment quota of Rmb1bn back on January 30 this year.
The slow pace of approvals is not just frustrating — it can have a real effect on investment decisions. Market conditions can change radically over such a period. There are likely to be firms that are still in the approval process who will take a very different view of buying RMB assets now than they would have done before the recent currency devaluation, for example.
Another thing holding back the opening-up of the CIBM is a shortage of investment tools for offshore players. Only foreign central banks, supranationals and sovereign wealth funds are allowed to participate in a broader range of interbank business that includes bond repo transactions, bond lending, bond forwards, interest rate swaps (IRS) and forward rate agreements (FRAs), in addition to existing spot trades.
As with the quota relaxations, these advantages are again targeting the wrong players. Private sector financial institutions would probably benefit far more from such freedom, but they are still waiting to be allowed to use leverage and derivatives to improve investment efficiency and increase trading opportunities, which would in turn add valuable liquidity to the market.
Approving foreign firms to participate in China's onshore markets is a useful first step, but much, much more is still needed. Regulators must have the courage to give new entrants the tools they need to fulfil their potential.