China has opened its bond market wider to foreign banks, naming the local arms of JPMorgan Chase and Standard Chartered Bank as primary underwriters of debt issued by the Ministry of Finance.
The two banks announced their appointment on Wednesday, calling it an important step for their participation in China's capital markets.
They join HSBC as the only foreign banks in the underwriting group, which the Ministry of Finance's Web site says has 43 members.
Standard Chartered said it had also been named in a separate, smaller group of primary dealers with which the People's Bank of China conducts open market operations.
This is a significant opening in the domestic market to foreign players, said Carl Walter, chief executive of locally incorporated JPMorgan Bank (China) Co Ltd.
Ministry of Finance officials had judged that the increasing maturity of the domestic market meant it was opportune to expand the circle of primary dealers to foreign banks experienced in underwriting sovereign bonds, JPMorgan said in a statement.
Joining the underwriting group conferred not only prestige but also an informational advantage, Walter told Reuters.
We should at least get a better feel for what the interest rate environment in China will be, and that definitely has an impact on FX trading and the risk management products we might be in the process of offering. You need to know what that environment is so you can price things, he said.
The bond market is growing fast in China. Banks traded 2.08 trillion yuan ($292 billion) in bonds for their institutional customers in 2007, up 63 percent from 2006, the PBOC said on Wednesday.
JPMorgan expected to more than double the size of its Shanghai dealing room for fixed income and foreign exchange over the next 12 to 18 months, Walter said.
He said the bond market was developing in the right direction, but it would benefit if interest rates were driven more by supply and demand and less by administrative guidance.
To that end, he said the experience of foreign banks could contribute to building a proper yield curve.
That has got to be developed because trying to price the new swap and hedging products that have been gradually introduced into the market over the past two to three years needs a yield curve of some kind, he said.
Underwriters get the right to bid for new government bond issues; in return they are required to underwrite at least 0.2 percent of each issue.
Standard Chartered said its twin role as underwriter and PBOC primary dealer would improve the linkage between the primary and secondary markets, thus contributing to the development of both.
As a primary dealer, Standard Chartered also gets to participate in auctions for new central bank paper.
(Reporting by Alan Wheatley; Editing by Edmund Klamann)