(Repeats story issued late on Wednesday)
* Bond investors can trade derivatives to hedge FX exposure
* Offshore investors remain cautious over market access
* Derivatives market still small with low trading liquidity
* New foreign investor rules likely to have limited market
By Umesh Desai and Winni Zhou
HONG KONG/SHANGHAI, March 1 China's move to open
its derivatives market to foreign bond investors could help
counter outflows but lingering concerns about capital controls
are keeping offshore investors cautious.
The authorities have redoubled efforts to lure overseas
investors and bump up bond market inflows after the relaxation
of rules on foreign investment.
Such measures could potentially help China win inclusion on
global bond indexes, but investors say market accessibility and
concerns about the yuan's stability could impede inflows.
"We don't like the aspect of unclarity about the potential
to move capital back out of the country," said Maurice Meijers,
Singapore CEO for Robeco, a Netherlands-based global asset
manager with 276 billion euros in assets under management.
Fundamentals and valuations were also concerns, he added.
"This feels like the wrong moment to get involved. Unless
this market really starts to become part of the benchmark
indices, it will stay like this for some time and I don't expect
major investors to jump in."
The stakes are large. Standard Chartered estimated that the
value of outstanding onshore bonds may rise to 82 trillion yuan
($11.93 trillion) by the end of this year from 64.3 trillion as
But foreign investment has been tiny. By the end of last
year, foreigners held a mere 870 billion yuan worth of bonds in
the Chinese market, an increase of 83.4 billion yuan from the
year before, the State Administration of Foreign Exchange said.
That investment growth has arguably been stunted by
government efforts to protect the yuan, which fell
6.5 percent against the dollar last year, prompting a barrage of
measures that made it harder to move funds offshore.
AXA Investment Managers economist Aidan Yao said doubts
about market accessibility and yuan depreciation were the main
obstacles to attracting more flows.
Last year, the China Interbank Bond Market (CIBM) scheme
liberalised the domestic bond market, encouraging foreign
investors to invest in yuan products.
Even so, the nascency of the derivatives market could be an
impediment, at least in the early stages.
"The derivatives market currently is still small in size
with low trading liquidity," said Ying Wang, senior director at
Fitch ratings. "So this new rule allowing foreign investors to
engage in derivatives is likely to have limited market impact."
Besides providing a boost to inbound flows, authorities are
also hoping it would lower funding costs for offshore investors.
Tommy Xie, an economist at OCBC Bank in Singapore, said
investors who had previously been forced to use offshore yuan
derivatives, could find cheaper alternatives.
"The offshore yuan pool has shrunk dramatically, and that
has led to relatively huge volatility in the yuan lending rate
and dollar swap rates. Uncertainty in financing costs has hurt
foreign institutions' interest in allocating more money in the
domestic bond market," he said.
In Singapore last week, Ma Jun, chief economist of the
central bank's research bureau, told investors the authorities
were studying the possibility of extending trading times and
settlement periods for foreign investors.
Such attempts to make the market more attractive could help
China's inclusion on global bond indexes - a boon that Goldman
Sachs estimated could spur inflows of potentially $250 billion.
But it will be an uphill battle that may hinge much more on
China's macroeconomic fortunes.
Patrick Song, fund manager at CSOP Asset Management, said
the latest steps were more symbolic at this stage.
"In the near term, we do not expect much inflows into China
as there are concerns around policy uncertainty related to
($1 = 6.8756 Chinese yuan)
(Additional reporting by John Ruwitch and Samuel Shen in
SHANGHAI, and Vidya Ranganathan in SINGAPORE; Editing by