Mainland China banks to offer over-the-counter interbank bond trading from May 1, PBOC says

Both mainland Chinese and international investors will be allowed to invest in interbank bonds through over-the-counter trades from May 1 as part of Beijing’s effort to attract investors into the country’s US$21.96 trillion bond market.

“By allowing investors to use the over-the-counter channels to invest in bond markets, it can efficiently convert residents’ bank savings into bond investments,” the People’s Bank of China (PBOC) said in a statement on Thursday. “This will enhance the investment returns for the residents, while at the same time it can further develop the bond market.”

In general, bonds offer better returns than bank savings, the central bank said, adding that the scale of government bonds held directly by Chinese residents remains relatively small compared to other mature markets.

Mainland China’s bond market is the world’s second-largest, with an outstanding volume of 158 trillion yuan (US$21.96 trillion). PBOC said the new rule could further encourage more investors to invest in the bond market.

At present, about 30 commercial banks offer over-the-counter bond trading services, but the products available are limited and trading is subject to requirements that deter individual investors.

Under the new rules, effective May 1, investors who want to trade bonds via such channels will need to open accounts at one or more of these lenders, but the trading process will be simplified and the menu of available bonds will expand to include trade treasury bonds, regional government bonds and other policy bonds that are trading in the interbank markets.

Besides mainland residents, overseas investors who are qualified to trade in the mainland interbank market can also open accounts with these lenders who have over-the-counter channels, PBOC said.

Under the system, banks, via their over-the-counter services, can offer a wide range of services to customers such as trading, custodianship and settlement of their bond investments, the PBOC statement said, adding that such development enhances market activity.

The banks that offer over-the-counter bond trading services must have a system in place to manage a suitability test of investors, learning about their risk appetite and affordability so as to sell them suitable bond products.

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“These organisations must have full disclosure about the risk factors and should never entice investors to trade in the bonds or other investment products beyond their risk affordability,” PBOC said.

The banks should also have a system to handle any potential disputes, according to the mainland Central Bank.