The Start of a New Age of Sino-Japanese Financial
Cooperation as a Result of the December 2011
Sino-Japanese Summit
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets Research

I.

Closer financial cooperation between China and Japan

1. Financial achievements of Sino-Japanese summit
On 25 December 2011, Japan's prime minister, Yoshihiko Noda, visited China for
the first time since coming to office and held a summit meeting with China's premier,
Wen Jiabao. Although the focus of the meeting was on politics and foreign affairs,
especially closer Sino-Japanese cooperation over the uncertain situation on the
Korean Peninsula, the two leaders also discussed economic relations between the twocountries. The main item of interest on this front was an agreement to improvecooperation on developing the two countries' financial markets.

2. Details of agreement on financial cooperation
According to the joint communiqué released after the summit by Japan's Ministryof Finance 1 and the People's Bank of China 2 , the two leaders agreed that the twocountries should cooperate more closely in the field of financial markets and foster
financial transactions between them in order to form even closer economic andfinancial ties. The two leaders also agreed that the two countries should cooperate in
the following specific areas, subject to the principle that any developments should bemarket-driven (Figure 1).

1) Encouraging the use of the yen and the renminbi for cross-bordertransactions between the two countries
The first main element of the agreement is measures to encourage the use of the
yen and the renminbi for cross-border transactions between the two countries. The
first of these is to encourage the use of the yen and the renminbi for settling trade1

2

See http://www.mof.go.jp/international_policy/convention/dialogue/japan_china_financial_cooperation.htm.
See http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2011/20111225191841656522157/
20111225191841656522157_.html.

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Figure 1: Enhanced Cooperation for Financial Markets Development
between Japan and China (Fact Sheet)Preamble

To support the growing economic and financial ties between Japan and China, the leadersof Japan and China have agreed to enhance mutual cooperation in financial markets of bothcountries and encourage financial transactions between the two countries, specifically in thefollowing areas, paying attention to the principle that these developments should be marketdriven.
I. Promoting the use of JPY and RMB in cross-border transactions between Japan and
China.
・ Facilitating trade settlement in JPY and RMB to reduce foreign exchange risks andtransaction costs for exporters/importers in both countries; and・ RMB-denominated FDIs from Japan to Mainland China, including to subsidiaries ofJapanese companies.

Items ofagreement

II. Supporting the development of direct exchange markets between JPY and RMB;
III. Supporting sound development of JPY and RMB bond markets.
・ ①RMB-denominated bonds issued by Japanese companies in Tokyo and other overseas
markets;②and RMB-denominated bonds issued by Japan Bank for International Cooperation in
mainland China markets as a pilot program; and・ Application process is underway for the Japanese authority to invest in Chinese
government bonds.
IV. Encouraging the private sector to develop JPY-denominated and RMB-denominatedfinancial products and services in the overseas markets; andV. Establishing “Joint Working Group for Development of Japan-China Financial Markets” topromote mutual cooperation in the above-mentioned areas.

Other items

In addition, we agreed to accelerate the ASEAN+3 financial cooperation, including
introducing the regional crisis prevention function and further strengthening the crisis
resolution mechanism of CMIM.

Source: Nomura Institute of Capital Markets Research, from Ministry of Finance and PBOC datatransactions, thereby reducing the exchange rate risk and transaction costs forimporters and exporters from both countries. The second is to encourage the use of therenminbi for direct Japanese investment in mainland China in general and investmentin the local subsidiaries of Japanese companies in particular.

2) Fostering the development of a market for exchanging yen and renminbi
directly
The second main element of the agreement is measures to foster the developmentof a market for exchanging yen and renminbi directly.

3) Fostering the healthy development of markets for yen and renminbi bonds
The third main element of the agreement is measures to foster the healthy
development of markets for yen and renminbi bonds. The first of these is to facilitate
the issuance of renminbi bonds by Japanese companies on markets outside China,
especially in Tokyo. It was also agreed to facilitate a pilot program for the issuance ofrenminbi bonds by the Japan Bank for International Cooperation (JBIC) on mainland
Chinese markets. The second measure is for Japan's monetary authorities to apply to
be allowed to invest in Chinese government bonds.
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

24) Encouraging the development of yen and renminbi financial products andservices by the private sector in overseas markets
The fourth main element of the agreement is measures to encourage thedevelopment of yen and renminbi financial products and services by the private sectorin overseas markets.

5) Establishing a joint working group to foster the development of financial
markets in Japan and China
The fifth main element of the agreement is measures to establish a joint working
group to foster the development of financial markets in Japan and China in order toencourage cooperation in the aforementioned areas.
The Chinese members of the working group will be the People's Bank of China
and some other authorities, while the Japanese members will be the Ministry of
Finance, the Bank of Japan, and the Financial Services Agency. The two sides also
agreed to consider and discuss whether there were any rules or practices that theyneeded to deal with on behalf of the private sector.

II. Significance of and issues raised by financial cooperationagreement
In our view, the financial cooperation agreement is not only an important step by
the two governments towards fostering financial transactions between their private
sectors: it also raises a number of issues.

1. Making it easier for Japanese companies to trade and invest
1) Previous moves to expand the use of the renminbi in cross-bordertransactions
The agreement should make it easier for Japanese companies to use the renminbi incross-border trade and investment transactions.
The Chinese authorities first allowed the renminbi to be used to settle tradetransactions on a limited scale in July 2009 but then extended this to all China's
trading partners in June 2010. Furthermore, trials on the mainland were extended tocompanies in all provinces and municipalities in August 2011 (Figure 2). Between
July 2009 and the end of September 2011 a total of RMB2,050.9 billion was used tosettle trade transactions. However, 90% of this total was transactions involving Hong
Kong.

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Figure 2: Deregulation and (cumulative) amount of trade settled in renminbi
August 2011: scheme extended to all of China■ Use of renminbi to settle trade transactions:extended to all of China（RMB100mn）
25,000January 2011: restrictions on outward direct
investment lifted■ Companies in the trial area allowed to makeoutward direct investments using renminbi

20,00020,509.1

December 2010: number of participating companies
increased■ Participating companies: 67,724
June 2010: extension of use of renminbi for trade settlement■ Trial area:●China: 20 provinces, municipalities, and autonomous regions●Overseas: no restrictions■ Participating companies: 365■ Transaction types: trade in goods and services, andtrade in general

15,00010,0005,000

14,675.0

8,702.5
July 2009: first trial use of renminbi for trade settlement■ Trial area:●China: Shanghai, Guangzhou, Shenzhen, Dongguan, Zhuhai●Overseas: Hong Kong, Macau, ASEAN■ Participating companies: 365■ Transaction types: merchandise trade only

5,099.3

1,970.8
35.8

219.4

2009 Q4

2010 Q1706.0

02010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

Source: Nomura Institute of Capital Markets Research, from PBOC and other data

The first use of the renminbi to settle investment transactions was in a direct
investment trial conducted in response to its increased use in trade transactions and inorder to enable the money to find its way back to the mainland3. During the trial
period, however, regional differences occurred in the way the rules were interpreted
and implemented. As a result, a new set of rules was introduced by the Ministry ofCommerce and the People's Bank of China on 14 October 2011 after Vice Premier Li
Keqiang gave a speech on the subject in Hong Kong on 16 August of that year. As of
14 December 2011, the Ministry of Commerce had received 78 applications for suchtransactions, 74 of which it had approved, according to Huang Feng, Vice Chairmanof the Department of Foreign Investment Administration4. These 74 direct investment
projects were worth a total of RMB16,530 million, and 70% of them in value terms
was initiated in Hong Kong.
Residents of Hong Kong have been allowed to open renminbi deposit accounts
since 2004. Bank of China (Hong Kong) is the only bank allowed by the People's
Bank of China to act as clearing agent for trade transactions settled in renminbi, thus
establishing a clearly defined route from the mainland. This is what is referred to as
Hong Kong's offshore renminbi market.

3

4

For more about renminbi-denominated inward direct investment and the issuance ofrenminbi bonds in Hong Kong, see Sekine, Eiichi, "Renminbi-denominated Inward Direct
Investment Gets Underway in China," Nomura Journal of Capital Markets, Spring 2012,Vol.3, No.4.
Business China, 15 December 2011.
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

4Figure 3: Issuance of dim sum bonds
IssuerYear

Residents

Policy banks (China Development Bank, Export-Import
2007 Bank of China)
State-owned commercial banks (Bank of China, etc.)―

2008 Policy banks, state-owned commercial banks―

Chinese government (Ministry of Finance)

Issue amount(RMB100mn)

Non-residents

100
120

―

2009 Policy banks, state-owned commercial banks

160

Foreign banks (HSBC, Bank of East Asia)
Chinese government (Ministry of Finance)2010 Policy banks, state-owned commercial banks

Non-financial companies (Hopewell Holdings,
McDonald's, etc.)

357.6

Financial companies (UBS, ANZ)

2011

Chinese government (Ministry of Finance)
Policy banks, state-owned commercial banks
Non-financial companies (Baosteel Group)

International financial organizations (World Bank, IFC,
Asian Development Bank)
Government-backed financial institutions (Korea
EximBank)

Approx. 1,000

Non-financial companies (YFY, Volkswagen, etc.)
Financial institutions (ICBC Asia)

Note:
Source:

The issue amount for 2011 is the amount announced by HKMA on 17 January 2012.
Nomura Institute of Capital Markets Research, based on data from the Securities andFutures Commission of Hong Kong and other sources

2) Establishing a route for an offshore renminbi market in TokyoIf, as a result of the agreement, a route can also be established for an offshore
renminbi market in Tokyo in addition to the market in Hong Kong, Japanesecompanies would probably be more willing to use renminbi.
If this is to happen, however, there needs to be a smooth flow of renminbi from
Hong Kong to Tokyo. Another possibility might be for Bank of China's Tokyo branch
to obtain a license from the Chinese authorities to act as clearing agent for the Tokyo
market, thus enabling a greater flow of renminbi from the mainland. It also remains tobe seen to what extent Japanese financial institutions could become involved in the
supply of renminbi to an offshore market in Tokyo.

2. Establishing and expanding a route for raising and investing renminbi
1) Renminbi bond issuance by Japanese companies on the Hong Kong market
Since 2007, mainland Chinese issuers have been allowed to issue renminbi bondsin Hong Kong, while, since October 2009, China's Ministry of Finance has issued
renminbi Chinese government bonds there (Figure 3). In addition, since a July 2010agreement between mainland China and Hong Kong to increase the use of therenminbi for settling trade transactions, non-Chinese companies and financial
institutions have also been allowed to issued renminbi bonds.
Called "Euroyuan bonds" by some, these bonds have tended to be affectionately
called dim sum bonds ever since the US fast food group McDonald's issued such abond in August 2010. Issuance of renminbi bonds in Hong Kong, including dim sum
bonds, grew from RMB10.0 billion in 2007 to RMB12.0 billion in 2008 and5

Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

RMB16.0 billion in 2009. However, after the Chinese authorities allowed therenminbi to be used for settling trade transactions in 2009, issuance increased to
RMB35.8 billion in 2010 and RMB86.8 billion as of 8 December 2011. In fact,issuance of dim sum bonds in 2011 appears to have reached RMB100 billion. A
number of Japanese companies have begun to issue dim sum bonds, while a number ofJapanese financial institutions have been involved in underwriting them.

2) Need for an offshore renminbi market in Tokyo to have adequate volume andliquidity
We would expect an increase in the issuance of renminbi bonds by Japanesecompanies to lead them to make more direct investments using the renminbi. In
particular, we would expect the issuance of renminbi bonds on a Tokyo offshore
market to make it easier for Japanese companies to use the renminbi. However, thisraises the issue of how to find investors for any such bond issues. We can imagine
situations where, depending on how active and liquid such a market was, it might benecessary to try to attract investors from Hong Kong.
If renminbi bonds were to be issued in Tokyo, the amount of renminbi available inTokyo to purchase such bonds would need to increase. For this to happen, the firstrequirement would be to foster the use of the renminbi to settle trade transactions on a
Tokyo offshore market. In particular, Japanese companies would have to be preparedto accept renminbi in payment for the goods and services they supply to Chinesecompanies. The second requirement would be for investors to be allowed to open
renminbi bank accounts. The third would be to study the rules governing the issuanceof renminbi bonds in Hong Kong as well as the associated disclosure requirements
and to combine these with the need for a convenient issuing system and investor
protection.

3) Need for greater diversity among issuers of renminbi bonds in mainland
China
Renminbi bonds issued by non-residents of mainland China are known as panda
bonds (in the same way as yen bonds issued by non-residents of Japan are known assamurai bonds) 5 . In February 2005 the People's Bank of China, the Ministry of
Finance, the State Development and Reform Commission, and the China Securities
Regulatory Commission (CSRC) jointly published Provisional Administrative Rules
on International Development Institutions' Issuance of RMB Bonds, and in October ofthe same year the Asian Development Bank (ADB) and the International FinanceCorporation (IFC) issued RMB1.0 billion and RMB1.13 billion, respectively, ofrenminbi bonds. Then, in November 2006, the IFC and the ADB issued RMB870

5For more about the issuance of panda bonds, see Sekine, Eiichi, "Chuugoku ni Okeru
Hikyojuusha Jinmingendate Saiken (Pandasai) Shijou no Genjou to Kadai" (China's
Panda Bond Market), Capital Market Quarterly, Summer 2006 (Japanese only).
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

6

million and RMB1 billion, respectively of such bonds. However, no more such bonds
have been issued since.
In May 2010 Bank of Tokyo–Mitsubishi UFJ issued RMB1.0 billion of renminbibank debentures on the Chinese interbank bond market, while in October of the same
year GMAC-SAIC Automotive Finance issued RMB1.5 billion of bank debentures on
the same market. Both issuers were resident in China. Similarly, in December 2011
Mitsubishi Corporation (China) Co., Ltd., Mitsubishi Corporation's Chinese
subsidiary, registered a program for issuing up to RMB500 million in commercial
paper, also on the interbank bond market. However, there have been no more such
issues by non-Chinese issuers since.
Therefore the issuance of panda bonds by JBIC, a Japanese government-backed
financial institution, should help to diversify the range of issuers on China's bondmarket and encourage non-Chinese private-sector borrowers to issue bonds inmainland China, regardless of whether they are residents or non-residents. However, anumber of technical issues will have to be resolved if non-residents are to issue
renminbi bonds. This will require clarification of some of the details of theaforementioned Provisional Administrative Rules, including issue terms, the use ofproceeds, disclosure requirements, and accounting standards.

3. Increase in the number of renminbi financial productsThis growing use of the renminbi for trade, investment and bond issuance is likely
to lead to a growing demand for and supply of renminbi financial products andservices. In this process, the aforementioned joint working group is likely to play a
key role in resolving any regulatory or practical constraints on the development ofsuch products.
Among the areas on which it was agreed that China and Japan should cooperate,
progress in developing a market for exchanging yen and renminbi directly is likely todepend on the pace and details of how China reforms its exchange rate system as thetwo are interlinked.
Also, on 19 August 2010, the People's Bank of China added the Malaysian ringgit
to the major international currencies against which it has traditionally set an official
mid-rate for the renminbi every day of the week: the US dollar, the euro, the yen,sterling, and the Hong Kong dollar. Then, on 22 November of the same year, it added
the ruble and, on 28 November 2011, the Australian dollar and the Canadian dollar.
Unlike the yen, whose exchange rate against the renminbi is set via the US dollar, therates of the Australian dollar and the Canadian dollar are quoted directly against therenminbi. Therefore, before the yen is quoted directly against the renminbi, more
research needs to be done into how the exchange rate mechanism works for currencies,
such as these, that are already quoted directly against the renminbi.

7

Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

III. Background to Japanese government's request to be allowed
to buy Chinese government bonds
1. China's increasing purchases of Japanese (government) bonds
One of the measures that was agreed is that Japan's monetary authorities will beallowed to apply to invest in Chinese government bonds.
We need to see this in the light of the fact that, since 2010, China has been an
increasingly active purchaser of Japanese (government) bonds. In the first sevenmonths of that year China purchased a net ¥2,315.8 billion of Japanese bonds (Figure4). Of this amount, ¥2,361.3 billion consisted of net purchases of short-term bonds
with a maturity of less than 12 months, while ¥45.5 billion consisted of net sales of
medium- and long-term bonds. We can therefore say that China was typically a net
purchaser of short-term bonds during this period. However, in August 2010, China
sold a net ¥2,018.2 billion of Japanese bonds, offsetting most of its net purchases
during the preceding seven months.
China remained a net seller of Japanese bonds in general after September 2010 andsought to gain from the strength of the yen. However, it remained a net purchaser of
medium- and long-term Japanese bonds from October 2010 to May 2011. In particular,
it purchased a net ¥165.2 billion in February 2011, a net ¥234.5 billion the following
month, and a net ¥1,330.0 billion the month after that. According to the latest figures,
China sold a net ¥2,567.2 billion of Japanese bonds in general between January andNovember 2011. While it sold a net ¥3,120.2 billion of short-term bonds, it purchased
a net ¥553.0 billion of medium- and long-term bonds.

Figure 4: Chinese purchases of Japanese (government) bonds【Monthly basis】【Annual basis】（億円）(¥100 mn)（億円）(¥100 mn)

10,000

4,000

2,556

7,352

8,000

2,133

5,831
4,564

6,000

2,000

4,000

380
2,000

0

2,625

2,116 1,978
879

453

0

-589

-787

-813 -1,407-1,693 -1,387-1,774-1,812 -2,099-2,000-2,000-4,000-3,361-6,000-4,000-26,000-25,672-28,000
2006年
2006

2007年
2007

2008年
2008

2009年
2009

2010年
2010

2011年
2011
1-11月
Jan-Nov-7,692-8,530-10,000-20,000-22,000-20,182
10 11 12 1月
10 11
1 2月
2 3月
3 4月
4 5月
5 6月
6 7月
7 8月
8 9月
9 10月11月12月
1 2月
2 3月
3 4月
4 5月
5 6月
6 7月
7 8月
8 9月
9 10月11月
1月
2010年
2010

Source:-2,456-5,169-8,000-4,678

2005年
2005

1,789

438

2011年
2011

Nomura Institute of Capital Markets Research, from Ministry of Finance data

The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

8

2. Significance of China's diversification of the way it manages its foreignexchange reserves
After overtaking Japan as the world's largest holder of foreign exchange reserves in
February 2006, China saw its foreign exchange reserves break the $3 trillion barrier inMarch 2011 and grow to $3,181.1 billion as of end-December 2011.
Some 70% of these reserves is reported to be denominated in US dollars, with mostof this amount managed by the State Administration of Foreign Exchange (SAFE), an
arm of the People's Bank of China, in the form of US Treasury securities. The choiceof US Treasuries can be attributed to China's need to make trade payments in US
dollars and to the liquidity of the US Treasury market. In September 2007, China
Investment Corporation (CIC) was established with an initial capital of $200 billion
from China's foreign exchange reserves and assigned the task of reducing thedownside risk and improving the return on the reserves it manages.
On 1 December 2009 SAFE published its Overview of Foreign Exchange
Administration. This was followed, in July 2010, by its publication of FAQs on
Foreign Exchange Management Policies. In both documents SAFE makes it clear thatits management of China's foreign exchange reserves is governed by three criteria:risk, liquidity, and return. The documents also reveal that SAFE invests in assets suchas government bonds, agency bonds, supranational bonds, corporate bonds, andinvestment funds, while it invests not only in major international currencies such as
the US dollar, the euro, and the yen but is seeking to diversify into emerging market
currencies as part of its policy of international diversification. The aforementioned
purchases and sales of Japanese bonds can be considered part of these diversification
efforts.

3. China's expanding government bond market
1) Mainland Chinese government bond market
Mainland China resumed issuance of government bonds in 1981, a few years after
the market-oriented reforms of 1978. Therefore 2011 marks the 30th anniversary ofthis resumption. There are three different types of Chinese government bonds: bookentry bonds, certificated bonds, and savings bonds. In addition, there are two primarymarkets for government bonds: the interbank bond market, which is regulated by the
People's Bank of China, and the exchange market, which is regulated by the CSRC.
However, the main primary and secondary market is the interbank bond market.
China issued RMB1,777.8 billion (roughly ¥22 trillion)6 of government bonds in2010 (Figure 5). In addition, there was RMB6,262.8 billion (roughly ¥77 trillion) ofgovernment bonds outstanding as of the end of 2010. This seems worlds apart from1981, when only RMB4.9 billion was issued.

6

We have converted amounts in renminbi as of end-2010 to yen using the mid-rate on 31
December 2010 (RMB1 = ¥12.3).

9

Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Figure 5: Issuance and outstanding amount of Chinese government bonds(RMB100mn)
70,00065,00060,00055,00050,00045,00040,00035,00030,00025,00020,00015,00010,0005,000
020%Issuance amount (lhs)18%

Amount outstanding at year-end (lhs)
Amount outstanding/GDP (rhs)

16%
14%
12%
10%
8%
6%
4%
2%
0%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source:Nomura Institute of Capital Markets Research, from Shanghai Wind Information
Co., Ltd., China Securities and Futures Statistical Yearbook, National Bureau of
Statistics, China Government Securities Depository Trust & Clearing Co. Ltd, andchinabond.com data

Figure 6: Ownership of book-entry government bonds
on mainland Chinese market (end-2010)
Fund
management
Stock
Insurance companies
exchanges
companies
1%
3%
6%
Other
0%
Nonbanks
1%
Specialsettlement
members
26%

Creditcooperatives
1%
Commercial
banks
61%

Note:

1. Ownership figures are for the interbank bond market.
2. The outstanding amount of book-entry government bonds as of the end of 2010
was RMB5,962.8 billion.
Source: Nomura Institute of Capital Markets Research, from chinabond.com data

2) Mainland Chinese government bonds aimed at domestic investors
Almost all the investors in mainland Chinese government bonds are Chinese
residents. For example, as of the end of 2010, 61% of the RMB5,962.8 billion ofbook-entry government bonds outstanding on the interbank bond market was held bycommercial banks, 26% by special settlement members (e.g., the People's Bank of
China, the Ministry of Finance, the policy banks, and China Government Securities
Depository Trust & Clearing Co., Ltd), and 6% by insurance companies, with roughly
90% held by commercial banks and the government sector (Figure 6).
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

10Figure 7: Main terms of third issue of renminbi government bonds in Hong Kong
Terms
Issue date

Details
17 August 2011
RMB20 billion (RMB15 billion for institutional investors, RMB5 billion for retailIssue amountinvestors)
2-year bonds
RMB5 billion (retail investors), coupon: 1.6％
3-year bonds
RMB6 billion (institutional investors), coupon: 0.6％
5-year bonds
RMB5 billion (institutional investors), coupon: 1.4％
7-year bonds
RMB3 billion (institutional investors), coupon: 1.94％
10-year bonds
RMB1 billion (institutional investors), coupon: 2.36％
Methods of tender and sale Government bonds for institutional investors are offered for tender and issued byHong Kong’s Central Moneymarkets Unit, and the Hong Kong branch of Bank ofCommunications Acts as issue agent
The lead managers for government bonds for retail investors are Bank of China(Hong Kong) and HSBC
Retail sales agents
19 banks(Mainland China)
Bank of China (Hong Kong), Bank of Communications (Hong Kong), China
Construction Bank (Asia), Industrial and Commercial Bank of China (Asia), CITICBank International, Shanghai Commercial Bank
(Hong Kong)

HSBC, Bank of East Asia, Chiyu Banking Corporation, Chong Hing Bank, Dah
Sing Bank, Hang Seng Bank, Nanyang Commercial Bank, , Wing Hang Bank,
Wing Lung Bank
(US, Europe, rest of Asia) Citibank (Hong Kong), DBS Hong Kong, Fortis Bank (Hong Kong), Standard
Chartered Bank (Hong Kong)

Source:Nomura Institute of Capital Markets Research, from Chinese Ministry of Finance data

The amount held by (resident) foreign banks, also as of the end of 2010, was only
RMB55.2 billion (roughly 0.9% of the book-entry government bonds outstanding on
the interbank bond market). In terms of increasing the market's liquidity, turnover anddepth, institutional investors play a key role on the bond market, and the advent offoreign institutional investors will probably help the market to develop.

3) Hong Kong's renminbi government bond market
Since 2004, it has been possible to open a renminbi deposit account in Hong Kong;
and, since 2007, mainland Chinese companies have been allowed to issue renminbi
bonds there. In October 2009 China's Ministry of Finance issued its first renminbi
bond in Hong Kong. In addition, since a July 2010 agreement between mainland
China and Hong Kong to increase the use of the renminbi for settling tradetransactions, non-Chinese companies and financial institutions have also been allowed
to issued renminbi bonds there.
Issuance of renminbi government bonds in Hong Kong has increased in the three
years since October 2009 from RMB6.0 billion to RMB8.0 billion in November 2011
and RMB20.0 billion in August 2011. Renminbi government bonds are one of themain instruments traded on Hong Kong's offshore market, and the Chinese
government is committed to continuing to issue bonds there.
Although there are no official statistics on the ownership of renminbi government
bonds issued in Hong Kong, the lion's share is taken up by banks from mainland
China and Hong Kong (Figure 7), and investors can buy them on the OTC market.

11 Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Although the amount of renminbi bonds that individual investors can buy OTC islimited to the amount they are allowed to convert into renminbi (RMB20,000/day),foreign investors can also buy them.

IV. Schemes for purchasing Chinese government bonds
1. Example of closer financial cooperation between China and Japan
We expect that the agreement and the Japanese government's resulting purchases ofChinese government bonds will contribute to the development of the Chinese bondmarket by encouraging other institutional investors, from both Japan and elsewhere, toparticipate in the market. Moreover, the participation of foreign investors should
extend the range of options available to Japanese investors if renminbi securities canbe traded internationally.

2. Scheme for qualified foreign institutional investors
There are two schemes that enable foreign investors to buy Chinese government
bonds on mainland China's bond markets.
The first is the Qualified Foreign Institutional Investor (QFII) scheme, establishedin 2002. Under this scheme, overseas institutions (such as fund managementcompanies, insurance companies, securities companies, commercial banks, andpension funds) that have been licensed by the CSRC are allowed to invest in Chinese
securities (such as listed equities, listed bonds, and shares in mutual funds) up to alimit (amount) set by the State Administration of Foreign Exchange (SAFE). As of
end-November 2011, 121 foreign institutions had been licensed by the CSRC, and thetotal limit (covering 108 institutions) set by SAFE, also as of end-November 2011,
was $21.14 billion.
In practice, however, the scheme has not given foreign investors (mainly fundmanagement and securities companies) access to the government bonds issued andtraded on the interbank bond market, whose primary and secondary markets are bothmuch larger than the exchange market. This is because the scheme only allows themto buy and sell securities listed on the exchange market.
However, under the scheme, investors place orders with mainland Chinese
securities companies and open custody accounts with mainland Chinese custodians.
As of end-November 2011, the 12 Japanese institutions licensed under the scheme
accounted for $2.1 billion (or 9.93%) of the total QFII investment limit (Figure 8). A
number of foreign central banks, including those of Norway ($700 million), Malaysia($200 million), Hong Kong ($300 million), and Singapore (n/a), have also been
licensed under the scheme (Figure 8). We assume that, once the agreement is signed,
the Japanese government will be able to benefit from the investment experience andexpertise of Japanese financial institutions and foreign central banks on mainland
China's markets.
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

12Figure 8: Criteria for recognition as qualified foreign institutional investor (QFII)(Japanese financial institutions and foreign government-sector institutions)Japanese institutional investors
Date of qualification
Investment limit
Nomura Securities
23 May 2003
$50 million (4 June 2003)⇒$350 million (increased on 7 November 2006)
Nikko Asset Management
11 December 2003 $50 million (9 February 2004)⇒$250 million (increased on 15 September 2004)⇒$450 million (increased on 17 May 2006)
Daiw a SMBC (Daiw a Securities Capital Markets)
10 May 2004
$50 million (5 July 2004)
Dai-ichi Life Insurance
28 December 2005 $100 million (22 February 2006)⇒$200 million (increased on 28 July 2008)
Shinko Securities (Mizuho Securities)
5 September 2006
$50 million (13 February 2007)
Sumitomo Mitsui Asset Management
25 September 2006 $200 million (13 February 2007)⇒$300 million (increased on 19 June 2008)⇒$350 million (increased on 28 July 2010)
Daiw a Asset Management
11 September 2008 $100 million (26 December 2008)⇒$200 million (increased on 26 November 2010)
Mitsubishi UFJ Morgan Stanley Securities
29 December 2008 $100 million (25 March 2009)
Sumitomo Trust & Banking
26 June 2009
$50 million (31 December 2009)
Nomura Asset Management
23 November 2009 $200 million (4 May 2010)DIAM
20 April 2010$200 million (1 September 2010)
Shinko Asset Management
25 November 2011 (tbc)
Total$2.1 billion
Foreign central banks
Institution
Date of qualification
Investment limit
Norges Bank
24 October 2006
$200 million (24 January 2008)⇒$500 million (increased on 5 December 2008)⇒$700 million (increased on 1 September 2010)
Bank Negara Malaysia
19 May 2009$200 million (4 September 2009)
Hong Kong Monetary Authority
27 October 2010$300 million (18 March 2011)
Monetary Authority of Singapore
8 October 2011
(tbc)
Bank of Thailand
16 December 2011 (tbc)
Bank of Korea
21 December 2011 (tbc)
Total$1.2 billion
Sovereign w ealth funds, government-backed banks
Institution
Date of qualification
Investment limit
GIC
25 October 2005
$100 million (16 November 2005)⇒$300 million (increased on 19 December 2008)
Temasek
14 November 2005 $100 million (12 December 2005)⇒$300 million (increased on 16 September 2009)
Abu Dhabi Investment Authority
3 December 2008
$200 million (17 January 2009)
Korea Development Bank
23 April 2009$100 million (9 November 2009)CPPIB
9 December 2011
(tbc)
Kuw ait Investment Authority
21 December 2011 (tbc)
KIC
28 December 2011 (tbc)
National Pension Service of Korea
5 January 2012
(tbc)
Total
$900 million
Institution

Note: 1.
2.
Source:“Date of qualification” is the date of recognition as QFII by CSRC.
The date attached to the investment limit is the date on which SAFE approved an
institution’s investment quota.
Nomura Institute of Capital Markets Research, from CSRC and SAFE data

13 Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

3. Interbank bond market scheme
The second scheme that enables foreign investors to buy Chinese government
bonds is the interbank bond market scheme. On 17 August 2010 the People's Bank of
China permitted (1) overseas central banks, (2) renminbi clearing banks in Hong
Kong and Macau (Bank of China), and (3) overseas banks authorized to settle tradetransactions in renminbi to participate in China's interbank bond market. In return,banks wishing to participate in the market were required to obtain a license and an
investment quota from the People's Bank of China.
Of the banks eligible in category (1), the Hong Kong Monetary Authority (HKMA)
obtained a license in December 2010. As it obtained a QFII license to invest in(renminbi-denominated) A shares in October 2010, its acquisition of a second license
meant that it was now licensed to invest in both mainland bonds and equities. Morerecently, on 10 November 2011, the Reserve Bank of Australia obtained a license toinvest in Chinese government bonds. Similarly, of the banks in category (3), Industrial
and Commercial Bank of China (Asia) and the Hong Kong branches of othermainland Chinese and overseas banks have also obtained licenses.
Other possibilities of translating the agreement into practice include negotiatedtransactions, which would be independent of these existing schemes. In any case,whatever scheme the Japanese government used to purchase Chinese government
bonds, it would be likely to mark a development in the opening up of the mainland
Chinese bond markets to overseas investors.

4. Impact on the internationalization of the renminbi
Although the People's Bank of China has yet to express an opinion about thepurchase of Chinese government bonds by the Japanese government, one of theBank's publications, Financial News, published the following assessments by threemainland Chinese experts on 24 December 2011 following a press conference byJapan's finance minister, Jun Azumi, on 20 December of that year.
First, Lu Zhengwei, chief economist of Industrial Bank, said that the Japanese
government's decision to purchase Chinese government bonds marked an important
step in the internationalization of the renminbi as it would be the first time that a G7
country had added renminbi to its reserves. He also said that he hoped the move
would help to broaden the range of investors in mainland China's bond markets, leadto the issue of more longer-term bonds, and improve their yield.
Second, Guo Tianyong, Director of the Research Center of the Chinese Banking
Industry, Central University of Finance and Economics, Beijing, said that China andJapan both faced the problem of how to diversify their foreign exchange reserves andthat purchases of each other's government bonds would be in their mutual interest.
Third, Liu Junhong, Director of the Globalization Research Center and Professorof the Institute of Japanese Studies, China Institute of Contemporary International

The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

14

Figure 9: List of renminbi swap counterparties
Country/area

Counterparty(central bank)

Agreement date

Korea

Bank of Korea(before renewal)

12 December 2008

Bank of Korea(after renewal)

Amount incounterparty
currency

Objective

1,800 3 years

KRW38trn

・Short-term liquidity boost
・Trade settlement
・Addition to Chiang Mai Initiative
・Possible use of each other’s currency as
reserve currency

26 October 2011

3,600 3 years

KRW64trn・Closer financial cooperation
・Encouragement of trade and investment
・Regional financial stability
・Possible use of each other’s currency as
key reserve currency and possible
percentage

Hong Kong Monetary Authority(before renewal)
Hong Kong Monetary Authority(after renewal)

20 January 2009

2,000 3 years

HK$227bn

22 November 2011

4,000 3 years

HK$490bn

・Short-term liquidity boost
・Trade settlement
・Financial stability in mainland China, Hong
Kong, and rest of Asia
・Facilitation of trade and investment in
mainland China and Hong Kong
・Development assistance to Hong Kong's
offshore renminbi market

Malaysia

Bank Negara Malaysia

8 February 2009

800 3 years

MYR40bn

Belarus

National Bank of Belarus

11 March 2009

200 3 years

BYR8trn

Indonesia

Bank Indonesia

23 March 2009

1,000 3 years

IDR175trn

Hong Kong

Size
Duration(RMB100mn)

Argentina

Central Bank of Argentina

2 April 2009

700 3 years

ARS38bn

IcelandCentral Bank of Iceland

9 June 201035 3 years

n.a.

・Trade and investment settlement
・Trade and investment settlement
・Short-term liquidity boost, trade settlement,
investment settlement
・Nothing in particular・Trade and investment settlement
・Trade and investment settlement
・Trade and investment settlement

Singapore

Monetary Authority of Singapore

23 July 2010

1,500 3 years

S$30bnNew Zealand

Reserve Bank of New Zealand

18 April 2011

250 3 years

NZD4.9bn

Uzbekistan

Central Bank of Uzbekistan

19 April 2011

7 3 years

UZS180.7bn

Mongolia
Kazakhstan

Bank of Mongolia
National Bank of Kazakhstan

6 May 201113 June 2011

50 3 years
70 3 years

MNT943.4bn
KZT157.4bn

ThailandBank of Thailand

22 December 2011

700 3 years

THB320bn

・Closer financial cooperation,encouragement of trade and investment, andregional financial stability

PakistanState Bank of Pakistan

23 December 2011

100 3 years

PKR140bn

・Closer financial cooperation,encouragement of trade and investment, andregional financial stability

UAE

Central Bank of the United ArabEmirates

17 January 2012

350 3 years

AED20bn・Closer financial cooperation,encouragement of trade and investment, andregional financial stability

Total・Trade and investment settlement
・Trade and investment settlement
・Trade and investment settlement

13,362

Source: Nomura Institute of Capital Markets Research, from PBOC data

Relations, said that the Japanese government's decision was a positive development in
the internationalization of the renminbi.
All three welcomed the decision as enhancing the renminbi's status and ending asituation where most of the countries with which the People's Bank of China has
concluded swap agreements (Figure 9) and most of those holding renminbi in theirreserves have been emerging economies.

V. Japanese government adopting a more positive attitude tofinancial cooperation with China
1. International competition to be an offshore renminbi market
One factor behind the agreement is probably international competition to become
an offshore market for a currency that is increasingly being used internationally. Japan

15 Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

(Tokyo) is not the only country (city) to have made moves towards becoming an
offshore renminbi market.

1) London
The first such case is London. At the Fourth UK-China Economic and Financial
Dialogue on 8 September 2011, the UK Chancellor of the Exchequer, George Osborne,
and Chinese Vice Premier Wang Qishan discussed the possibility of the renminbi
being traded in the City. At the end of October 2011 Bank of Tokyo–Mitsubishi UFJ
London became the first European branch of a Japanese bank to trade the renminbi7.

2) Singapore
The second such case is Singapore. On 11 March 2011 the Singapore branch ofIndustrial and Commercial Bank of China, one of China's four main state-owned
commercial banks, opened the bank's first overseas renminbi processing center. The
center offers the following renminbi services: deposits, settlement, credit cards,
internet banking, and cash transactions. The branch first accepted renminbi deposits in2002 and, as of end-February 2011, had RMB 2.0 billion in renminbi deposits and had
settled RMB12.4 billion in trade transactions.
The next development was on 9 September 2011, when Tommy Xie Dongming, aneconomist at OCBC Bank in Singapore, proposed establishing an offshore renminbi
market in Singapore following a similar proposal by the UK government at the Fourth
UK-China Economic and Financial Dialogue in London (see above)8.

3) Taiwan
The third such case is Taiwan. In May 2011 the Financial Supervisory Commissionof Taiwan's Executive Yuan announced that it would allow the overseas banking units(OBUs) and the foreign commercial representations of Taiwanese banks to engage in
RMB business. On 15 September 2011 HSBC became the first foreign bank to be
granted a license to offer RMB products and services in Taiwan and began offering
RMB-related services through its offshore banking units on 19 September of that year.
As far as Japanese banks are concerned, Mizuho Corporate Bank's Taipei branch was
granted a license on 26 September 2011 and began offering RMB-related services on
29 September of that year.
At about the same time, on 14 August 2011, Taiwan's central bank listed being an
offshore renminbi center as one of its long-term policy goals.

7
8

See Nihon Keizai Shimbun, 30 October 2011.
See ftchinese.com, 9 September 2011.
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

164) Tokyo
In 2011 a number of online brokers in Tokyo (Rakuten Securities, SBI Securities,
and Monex) began to offer their customers renminbi bonds9. Similarly, on 11 October
2011, Jibun Bank began to offer its retail customers renminbi deposits. Japanese retailinvestors therefore already have access to renminbi financial products. Moreover, inNovember 2011, Sumitomo Mitsui Banking Corporation signed a memorandum of
understanding on renminbi banking services, including offshore trading, with Bank of
China10.
The difference between Tokyo and other cities and countries seeking to establish
offshore renminbi centers (i.e., those other than Hong Kong) is that, in the case ofTokyo, there is an official working group set up by both the Chinese and Japanese
governments to deal with the use of the renminbi. On 16 January 2012 HKMA and the
UK Treasury announced the launch of a joint private-sector forum to enhancecooperation between Hong Kong and London on the development of an offshore
renminbi market. However, the agreement between China and Japan is the first suchagreement among G7 members.

2. Japanese government adopting a more positive attitude to financial
cooperation with China
In our opinion, the agreement marks a new stage in financial cooperation between
China and Japan.
First, it marks a major change in the Japanese government's attitude to financial
cooperation with China as a result of China's emergence as an economic power. In thepast, financial cooperation between the Japanese and Chinese governments took theform of a considered response by the Japanese government to a request by the
Chinese government. Examples of this are the Japanese government's four yen loans
to China (the first soon after the market-oriented reforms of 1978) and a series ofloans by the former Export-Import Bank of Japan (now Japan Bank for International
Cooperation). In contrast, the current agreement (as exemplified by the Japanese
government's request to be allowed to buy Chinese government bonds) represents a
more positive approach by the Japanese government where it has taken the initiative.
Second, the agreement marks the Japanese government's approval, indeed
encouragement, of the use of the renminbi as well as the yen by Japanese companies
and financial institutions for trade, investment, foreign exchange and bond dealing. In
fact, we welcome the Japanese government's efforts to take advantage of theinternationalization of the renminbi and establish an offshore renminbi market inTokyo as a move to revitalize Tokyo as a financial center. Since the agreement, in

910

See Nihon Keizai Shimbun, 9 November 2011.
See Nihon Keizai Shimbun, 24 November 2011.

17 Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

January 2012, Japanese banks have been quick to make domestic loans11 and offer
letters of credit12 in renminbi.
Third, the agreement extends to capital markets. As it is based on the principle thatany developments should be market-driven, we would not be surprised if it led to theestablishment of new financial markets, including bond markets, depending on theinitiative of the private sector.
While we will have to wait for history to judge the agreement, it is probably fair tosay at this stage that it is, at the very least, an attempt to redefine Japan's role in Asianfinance. As far as the details of the agreement are concerned, much will presumably
depend on the enthusiasm and ability of financial market participants to put it into
practice. We expect the agreement to attract the attention of other members of the G7
and other countries in Asia, and it will be interesting to see whether it will indeed be
the historical turning point that it promises to be.

1112

By Mizuho Corporate Bank. See press release of 6 January 2012 and Nihon Keizai
Shimbun, 7 January 2012.
By Bank of Tokyo–Mitsubishi UFJ.
The Start of a New Age of Sino-Japanese Financial Cooperation
As a Result of the December 2011 Sino-Japanese Summit

18