China allowed more international investors to buy bonds on thenation's largest debt market and purchase higher-yielding notes forthe first time, as the world's second-biggest economy develops itscapital markets.

Participants in the Qualified Foreign Institutional Investorprogram are now allowed to buy bonds on the interbank market, theChina Securities Regulatory Commission said in a July 27 statementon its website. Previously, they were restricted to exchange-listeddebt, which is less than 2 percent of the interbank equivalent.

International investors will also now be permitted to buy bondsof small- and medium-sized companies through private placements,the regulator said. Such securities typically yield more than theircounterparts listed on China's stock exchanges.

The changes to the so-called QFII scheme, which allocates quotasto non-Chinese investors and was introduced in 2002, come after thegovernment almost tripled allotments under the program in April to$80 billion from $30 billion.

“This is a very significant step,” Becky Liu, a Hong Kong-basedcredit strategist at HSBC Holdings Plc said in a phone interview.“The demand is likely to be for the top-tier names as they have thehighest yield pick-up over offshore peers.”

The amount of money invested through the QFII is still too smallto have an impact on China's total bond market and half of the QFIIquota has to be allocated into equities, Liu said.

The move builds on steps to open China's fixed-income market toinvestment from outside the country. Authorities announced aprogram in 2010 to allow foreign central banks, clearing banks forcross-border yuan settlement in Hong Kong and Macau and otherinternational lenders involved in trade settlement to invest in theinterbank bond market.

There were 20.8 trillion yuan ($3.26 trillion) of thesecurities, which are traded over-the-counter among commerciallenders and other financial companies, outstanding as of the end ofJune, according to Chinabond. The figure includes debt issued bythe central government, banks and companies, and compares with379.5 billion yuan on the exchange-listed market.

China started sales of private placement bonds by small andmedium-sized companies in June. Suzhou Huadong Coating Glass Co.sold 50 million yuan of two-year notes priced to yield 9.5 percent.Two-year government securities yield 2.36 percent.

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