China Allows Global Funds to Trade Government Bond Futures

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(Bloomberg) — China will allow foreign investors to trade government bond futures from Friday, the latest in a series of steps to attract global capital to its debt market.

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The nation’s regulators will allow qualified international investors to participate in bond futures trading for hedging purposes, according to a statement by the China Securities Regulatory Commission. The initiative is aimed at improving interest-rate risk management tools for overseas institutional investors and to enhance the attractiveness of yuan-denominated bonds, it said.

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The move provides global funds with the safety tools they have long sought after to manage interest-rate risks while investing in China. The measure is expected to lure more foreign inflows into the world’s second-largest bond market, especially at a time when the nation’s assets have emerged as a haven of sorts amid the ongoing conflict in the Middle East.

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“The move should make yuan fixed-income assets more appealing and help anchor longer-term, more stable participation,” said Hao Zhou, chief economist at Guotai Junan International Holdings.

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“If implemented smoothly alongside clear risk controls, it can reinforce market depth and the international attractiveness of China’s bond and derivatives ecosystem.”

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China’s modern government bond futures market, which debuted in 2013, offers contracts across two-, five-, 10-, and 30-year tenors. The new rules further liberalize the sector after Standard Chartered China became the first foreign bank unit to be granted trading access in 2023.

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The latest move follows a string of reforms aimed at opening up China’s financial markets. It builds on last September’s decision to expand foreign investors’ access to the onshore bond repurchase market. Regulators also adopted the ICMA Global Master Repurchase Agreement to bring domestic trading standards in line with international practices.

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China allowed foreign investors to trade interest-rate swaps from Hong Kong in 2023, enabling some hedging transactions via derivative contracts.

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The move to further open up the bond market coincides with Beijing’s efforts to internationalize the yuan and comes as China’s energy resilience provides a sturdy backdrop for domestic assets. 

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The expansion comes at a critical time, as overseas investors’ bond holdings have steadily declined over the past four years. They held 1.95 trillion yuan ($285 billion) of such notes at the end of March, the least since December 2020.

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Despite these headwinds, analysts are positive on the new rules.

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“This is another step to enhance the availability of risk hedging instruments, which will promote foreign participation in the bond market,” said Frances Cheung, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp. in Singapore.

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—With assistance from Qizi Sun.

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(Updates with background and quotes)

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