China has been attracting massive foreign inflows into its stock and bond markets over the past two years through a series of reforms. But the shortage of hedging tools or channels has long been a source of pain for global investors in China.

China will simplify the process for foreign institutional investors to trade foreign exchange derivatives, the State Administration of Foreign Exchange said in a notice published on its website.

Foreign institutional investors will be allowed to use onshore derivatives to hedge risk exposure in China's interbank market, the notice said.

The measures are due to take effect on Feb. 1.

China's $13 trillion bond market, the world's second biggest, has been a magnet for yield-hungry investors struggling in a low- or negative-yield environment in developed countries.

Foreign flows into China have been supported by the 20-month phased inclusion of Chinese bonds in the Bloomberg Barclays Global Aggregate Index, which began in April 2019.

JPMorgan said in September that it would add Chinese government bonds to its emerging market local currency bond index from February 2020.

(Reporting by Andrew Galbraith and Samuel Shen; Editing by Toby Chopra and Alex Richardson)