China
is moving to open up its economy – the second largest in the world – to non-domestic
capital as the Asian giant’s central bank formally granted qualified foreign
institutional investors access to the onshore interbank bond market, a move
that should boost the renminbi, or yuan, over time, Bank of America Merrill
Lynch said.

In an Asian Strategy Watch note, Bank of America Merrill Lynch said it
expects the speed with which QFII quotas fill up to accelerate.

There have been a number of moves by China’s
policymakers to open up the country to overseas investments in recent months to
help the country recover from its recent deceleration in economic growth. It is
also seen as part of a move to develop the renminbi into a more international
currency.

The move comes after the China Securities Regulatory
Commission revised QFII rules last July, to allow QFIIs to invest in the same
interbank bond market. The People’s Bank of China is the main regulator of this
market and has set out detailed rules, paving the way for the actual entries to
take place.

Since last August, foreigners’ bond holdings have surged
from RMB92 billion to RMB192 billion (as of February), a 110 per cent jump in
seven months.

As of 28 February, QFII quotas, standing at $40.8 billion,
had been awarded to a total of 186 institutions, but the quota falls short of
the total available at $80 billion.

Among the details of the new rules, the PBOB stated that QFIIs can now invest in equities, bonds and warrants; fixed income products; security investment funds; stock index futures.