The decision to broaden foreign banks’ access to the $2.9 trillion domestic interbank bond market is part of China’s attempt to internationalise its currency. The People’s Bank of China says foreign central banks, lenders in Hong Kong and Macao that already clear yuan and foreign banks involved in cross-border yuan trade settlement have been invited to join a pilot project to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back”. The goal is to cut China’s dependency on the U.S. dollar for trade and to promote the yuan’s standing as a potential reserve currency.
Less than one fifth of one percent of China’s foreign trade is denominated in yuan. If foreigners are going to use the yuan more widely, trade alone won’t do it; they have to have somewhere to invest in yuan. So for the first time non-resident firms will be able to buy and sell yuan-denominated government and corporate debt directly (there is already limited ability to do so indirectly via exchange-trade securities). There will, however, be quotas on volumes. How quickly those are expanded will be a measure of of how well the central bank thinks the experiment is going.