China will open its onshore bond market further to foreign institutions by relaxing the limits on crossborder capital flows, which in turn will boost global holdings of Chinese financial assets, experts said.

According to draft new regulations published by the People's Bank of China, the central bank, if foreign institutions use both yuan and foreign currency to invest in the onshore bond market, they only need to meet the requirements imposed on foreign currency outward remittances.

The draft, which was released late on Monday for public opinion, said accumulated foreign currency used for outward remittances should not exceed 120 percent of the total foreign currency used for bond investments, compared with 110 percent earlier.

There will be no limit, once the new rules are approved, for outward remittances, especially when foreign investors use a single currency, either yuan or a foreign currency, to invest in the bond market, it said.

Foreign institutional investors can choose various currencies to invest in the Chinese bond market. However, the yuan would be encouraged for cross-border receipts and payments as it offers a complete cross-border settlement through the Cross-Border Inter-Bank Payments System, a financial infrastructure under the Chinese central bank, according to the rules.

Foreign institutions will also be allowed to trade bond derivatives in the exchange market to hedge risks.

Policymakers have been striving to boost foreign capital flows to China's onshore bond market. The PBOC, the China Securities Regulatory Commission and the State Administration of Foreign Exchange together published rules on Sept 2, to open the onshore exchange bond market to foreign investors. Before that, foreign financial institutions were allowed to trade only bonds in the interbank market.

The rules have also simplified the application procedures for overseas bond investors and unified the regulations governing various investment channels.

The measures seek to strengthen market integrity, improve bond liquidity and encourage foreign participation in China's bond market, said experts. It will further ease bond market access, reduce foreign investors' concerns on outward fund remittances and encourage capital inflows, said Zhou Maohua, an analyst with China Everbright Bank. "It will also increase the overall holdings of yuan-denominated assets."

In addition, the use of CIPS will help reduce risks from fluctuating foreign exchange rates and strengthen the yuan's position as an international investment and reserve currency, Zhou said.

"We also expect more reforms in the corporate bond market with regulators likely to focus on strengthening bondholders' rights and increasing global ratings agencies' coverage in the next one to two years, and tackle reforms related to bond default resolution in the longer term," said Robin Xing, Morgan Stanley's chief economist in China.

China's onshore corporate bond market will most likely be the last to benefit from further opening-up measures in the financial system, which aim to boost foreign capital inflows. The measures may include QFII relaxation and license extension to foreign securities firms and asset managers, as well as potential investment banking and asset management license extensions to select banks, said Xing.

The annual foreign investment in the government bond market could reach $80 billion to $120 billion every year from this year to 2030, he said.

David Chao, global market strategist (Asia-Pacific except Japan) of Invesco, expects Chinese bonds to be included in the FTSE Russell World Government Bond Index soon, with an announcement likely on Friday. In February, China's government bonds were included in JPMorgan's series of Government Bond Index-Emerging Market (GBIEM) indexes.