2020.09.08 XIE, Qing (Natasha)、 ZHANG, Chi
On September 2, 2020, the People’s Bank of China (PBOC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE) jointly issued the Circular on Matters Concerning Foreign Institutional Investors’ Investments in China’s Bond Market (Consultation Paper) (“Consultation Paper”).
China has two separate and differentiated bond markets – the interbank bond market (i.e. CIBM) and the exchange bond market. Foreign investors may invest in the interbank bond market via any of the following three channels, namely, (a) QFII/RQFII, (b) direct investment in the interbank bond market (“CIBM Direct”) and (c) Bond Connect. They may also invest in the exchange bond market via QFII/RQFII.
Since bond markets are separately regulated by different authorities, they do not always concur in terms of market opening up to foreign investors. In such context, the regulators jointly announced the Consultation Paper to clarify the overall policy designing for the opening up of China’s bond markets. The Consultation Paper, in line with the principle of “one set of standards and one set of rules applicable to one China’s bond market”, aims to unify the qualification requirements for foreign investors to invest in China’s bond market as well as optimize relevant procedures, so as to encourage foreign investors to invest in China’s bond market to achieve RMB asset allocation.
This article will briefly summarize the following notable points of the Consultation Paper for foreign institutional investors.
The qualified foreign institutional investors under the Consultation Paper include:
(1)Foreign central banks or monetary authorities, international financial organizations, sovereign wealth funds (collectively as “Sovereign-type Institutions”);
(2)Various types of foreign financial institutions legally registered and incorporated, including foreign commercial banks, insurance companies, securities companies, fund management companies, futures companies, trust companies and other asset management institutions; and
(3)Other medium and long-term institutional investors including pension funds, charity funds, endowment funds ((2) and (3) collectively as “Commercial-type Institutions”).
The foregoing qualification requirements are substantially in line with the scope of qualified foreign institutional investors enumerated in the PBOC Circular (2016) No. 3, and the definition of qualified foreign institutional investors under the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) issued by the CSRC on January 31, 2019.
At present, a foreign investor investing in the interbank bond market through CIBM Direct or via QFII/RQFII is required to enter into a settlement agency agreement with its settlement agency or domestic custodian bank (“Settlement via Agency Model”), and file with the Shanghai Head Office of the PBOC via its settlement agency or custodian bank. If a foreign investor uses products (such as funds or trust plan products which do not have the status of a legal person) to invest in the interbank bond market, it is required to file for each product separately. Unlike CIBM Direct or QFII/RQFII, under Bond Connect, a member of the Central Moneymarkets Unit (CMU) will file with the Shanghai Head Office of the PBOC on behalf of the foreign investor via the Bond Connect Company Limited, a joint venture established by the China Foreign Exchange Trade System (CFETS) and the Hong Kong Exchanges and Clearing Market.
The Consultation Paper simplifies the current procedures required for the Settlement via Agency Model. Foreign Commercial-type Institutions may submit applications to the Shanghai Head Office of the PBOC electronically, and the Shanghai Head Office of the PBOC no longer requires foreign investors to submit a settlement agency agreement. In addition, foreign institutions do not need to submit applications in the name of the products, that is, they do not need to submit an application for each product. Notably, the cancellation of the individual filing of products managed by the same institution should not affect the current naming method adopted by foreign institutions when opening relevant bank or bond trading accounts, namely, “investment manager name + product name”. This naming method distinguishes relevant accounts under the name of product from the investment manager’s proprietary account, thereby confirming the beneficial owner identity of the fund product as the investor.
The Consultation Paper specifies that foreign institutions that invest in the interbank bond market through CIBM Direct or under Bond Connect are not required to additionally apply for the qualification to invest in the exchange bond market. Instead, they may invest in the exchange bond market either directly or under the domestic intra-market connect scheme. This echoes the joint announcement issued by the PBOC and the CSRC in July 2020 regarding the domestic intra-market connect scheme between the infrastructure institutions in the exchange bond market and that of the interbank bond market.
Additionally, the CFETS started a trial operation of the direct trading service under the CIBM Direct (“CIBM Direct Trading Service”) beginning September 1, 2020, which supports foreign institutional investors to use their usual trading platform to solicit cash bond trading with domestic market makers by requesting for quotation (RFQ) and confirm the trade based on the quote from market makers in the CFETS system. At present, Tradeweb and Bloomberg have cooperated with the CFETS to provide foreign investors with the CIBM Direct Trading Service, and foreign investors may also use convenient functions such as conducting compartment and package transactions. Foreign investors investing in the interbank bond market through CIBM Direct and QFII/RQFII may participate in this arrangement after submitting a letter of commitment and an application form requesting for direct trading service to the CFETS through its settlement agency. The CIBM Direct Trading Service helps improve the current situation where foreign investors using CIBM Direct may only entrust their domestic settlement agents to initiate bond transactions or make inquiry trading, thereby further increasing the efficiency of foreign investors’ investment and trading of Chinese bonds.
The Consultation Paper allows foreign investors to conduct bond spot trading, to trade related derivative products and bond funds (including ETFs), as well as to conduct other transactions permitted by the PBOC and the CSRC on the China’s bond markets. There is no change in the permitted investment products and investment scope for foreign investors, namely, foreign investors qualified to invest in the bond markets may carry out spot trading of bonds, and may also conduct bond lending, bond forwards, interest rate forwards, and interest rate swaps based on hedging needs. It remains to be stipulated by the regulatory authorities whether investors under the Bond Connect may conduct the foregoing trading including bond lending, bond forwards, interest rate forwards, interest rate swaps based on hedging needs.
Additionally, we note that the Circular on Further Facilitating Foreign Institutional Investors’ Investment in the Interbank Bond Market (Consultation Paper) issued by the PBOC and the SAFE on May 10, 2019 only allows a two-way transfer of bonds and funds under QFII/RQFII and CIBM Direct for the same investor. Pursuant to the Consultation Paper, the same investor may, according to its own investment management needs, make a two-way non-transaction-type transfer between its bonds and funds under QFII/RQFII and the bonds invested and funds under accounts opened in accordance with the Consultation Paper. It remains to be stipulated in the relevant detailed implementation rules whether the foregoing arrangement can be interpreted as allowing the transfer of bonds and funds under all related accounts of QFII/RQFII, CIBM Direct and Bond Connect with respect to the same institution.
In addition to the current Settlement via Agency Model, the Consultation Paper introduces a model of “Global Custodian Bank + Local Custodian Bank”, that is, a foreign investor that invests in the interbank bond market may, directly or via its global custodian bank, entrust a qualified local custodian bank to exercise custody over its assets, meaning that the global custodian bank only needs to sign a one-off sub-custody agreement with the local custodian bank, thereby saving the time spent by the foreign investor and the domestic custodian bank in the process of onboarding new clients and negotiating new agreements.
Currently, there are neither quota requirements nor lock-up restrictions regarding capital remittance for foreign investors investing in China’s bond markets through QFII/RQFII, CIBM Direct or Bond Connect. The Consultation Paper reaffirms that the regulators will unify the regulatory requirements for funds receipt and payment, exchange, and foreign exchange risk management of foreign institutions investing in China’s bond markets, and further optimize and facilitate the inward and outward remittance of investment funds.
We will continue to monitor the situation and keep our clients apprised of any important developments.