BEIJING--China, in a move to heighten trust in its strengthening currency, gave the go-ahead for Japan on March 13 to purchase up to $10.3 billion (855 billion yen) of its government bonds.
Since Beijing eased regulations on foreign government investments in yuan-denominated stocks and bonds, countries have been lining up to make purchases.
In the past, countries concentrated on U.S. dollar-denominated investments. But they are now keen to diversify their portfolios in foreign financial products.
Japan, too, has high hopes that its expanded investments in China will strengthen its relations with its giant neighbor.
In response to the March 13 quota announcement, the Japanese government plans to dip into its $1.3 trillion in foreign currency reserves to begin buying Chinese bonds.
Japan’s quota of $10.3 billion accounts for slightly less than 1 percent of China’s outstanding government bonds.
Austria has been also granted permission to purchase Chinese bonds, although the quota has not been revealed.
Malaysia and Singapore are also thought to now hold Chinese bonds.
Previously, China had tight restrictions on whom it allowed to buy yuan-denominated bonds and stocks. Only foreign institutional investors that met certain conditions were allowed to do so.
However, various government-affiliated institutional investors recently began clamoring for access to the market. By March 9, the central banks and sovereign funds of South Korea, Thailand and Kuwait, among other countries, had been granted permission.
Japan’s purchase quota is especially big compared to those allowed for major foreign institutional investors, which were up to $700 million in stock and bond purchases. That is because, unlike stocks, government bonds do not exert a large influence on markets as the number of participants and movement of prices in the bond market are limited.
Japan will implement its purchases of Chinese bonds gradually.
“We plan to start off with a small investment,” said Finance Minister Jun Azumi.
A Finance Ministry official said the purpose of purchasing the bonds was to “exchange information and strengthen cooperation with the Chinese government.”
Other countries have different aims: They want to spread their investments across a wider range of instruments, pulling away from concentrating on U.S. dollar-denominated financial products.
With the value of the yuan expected to rise, “investors have been forming a line, waiting for approval,” said Guo Shuqing, chairman of the China Securities Regulatory Commission.
Due to strong government controls, the yuan cannot be traded freely, and that has inhibited foreign government investments in the currency.
But according to one high-ranking official at the central bank of an Asian country, China’s rapid economic ascent has led many market observers to expect the strict “regulations on the yuan to begin easing. Given the economic ties with China, it is a natural choice (to invest in yuan-denominated financial products).”
In response, the Chinese government has begun promoting expanded purchase quotas, with the expectation of higher international trust in the yuan.
Behind such moves lies a Beijing strategy to diversify the global currency market, currently based on the U.S. dollar, “in accordance with the actual economic situation,” the People’s Bank of China (PBC), the country’s central bank, said.
As for Japan’s planned purchase of Chinese government bonds, Yi Gang, deputy governor of the PBC, told a March 12 news conference, “In the government bond markets (in Japan and China), the potential for mutual investment, cooperation and development is very big.”
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