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China took a major step toward giving foreigners free access to the world’s third-largest bond market as it tears down restrictions on capital inflows to counter a cash exodus that’s driven the yuan to a five-year low.

The People’s Bank of China said in a statement on its website Wednesday that most types of overseas financial institutions will no longer require quotas to invest in the interbank bond market, which accounts for the bulk of debt in the nation. Commercial lenders, insurance companies, securities firms and asset managers were included on a list of those eligible and the authority said it also hopes to attract long-term investors such as pension funds and charities. Hedge funds were not included, while foreign central banks and sovereign wealth funds won access in June.

The interbank market totaled 35 trillion yuan at the end of January and foreigners held less than 2 percent of this, ChinaBond data show. China’s 10-year sovereign yield of 2.87 percent compares with 1.69 percent in the U.S., the world’s largest bond market, and sub-zero in second-ranked Japan.

"Many foreign investors will be interested in coming onshore as China’s bond yields are higher compared with other nations," said Iris Pang, a senior economist for Greater China at Natixis SA in Hong Kong. "This will help offset some outflows but I don’t expect it to bring significant inflows in the short run as foreign banks still need time to research into China’s bond market. I expect much more inflows to take place in the second half of 2016."

Today, The People's Bank of China injected CNY340 billion via seven-day reverse repos at open-market operations. Total, this week PBOC injected CNY580 billion into open-market operations.

The monetary authority has added 580 billion yuan ($88.8 billion) to the financial system this week via auctions of seven-day reverse-repurchase agreements, less than the 960 billion yuan of contracts that mature through Friday.

Bank of Japan board member Takahide Kiuchi Thursday warned against side-effects of the negative interest rate policy and argued that 2% inflation that the bank is trying to achieve is too high for Japan's near-zero growth potential.

The BOJ's new easing tool of charging a 0.1% interest on a part of excess reserves deposited by lenders at the BOJ "may have additional negative effects on financial institutions' profits, mainly through a narrowing of interest rate margins on loans and a reduction in yields on financial assets, and this potentially could undermine financial system stability," he said.

Financial institutions - to compensate for deterioration in their profits - could pass on costs to their depositors and borrowers by, for example, not only lowering deposit rates but also increasing lending rates and transaction fees, Kiuchi told business leaders in Kagoshima City, southwestern Japan.

"This conversely could lead to monetary tightening effects," he said.

Today, U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 0.9% to $31.86 per barrel. The international Brent crude benchmark LCOc1 was trading at $34.06 per barrel down 1.03% from its last close

Crude prices fell on Thursday as strong gasoline demand and lower U.S. crude output failed to counter downward pressure from global overproduction that has left storage facilities swelling with unsold oil.

U.S. gasoline demand stood at 9.06 million barrels per day (bpd) during the week ending Feb. 19 compared with 8.6 million bpd in the week ending Jan. 22, the Energy Department said.

Reference: PBOC, Reuters, MNI News, Bloomberg