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China to roll out red carpet for foreign investors in bonds

(ATF) In a move to encourage more foreign investors in China’s bond market a new draft regulation has been announced, subject to comment.

It stipulates that foreign institutions that enter the interbank bond market through direct market entry channels and Bond Connect do not need to apply repeatedly. They can invest in the exchange bond market directly or through interconnection. 

At the same time, a foreign institution will be allowed to transfer bonds under the Qualified Institutional Investors (QFII) and Renminbi QFII programs, and bonds investments in accordance with proposals to allow two-way non-trading domestic transfers. 

The investment types and scope of overseas institutions are consistent with current regulations. Foreign institutions that have entered the market can conduct spot bond transactions, and bond lending, bond forwards, forward interest rate agreements, and interest rate swaps based on hedging requirements.

In order to further strengthen the system’s integrity and the synergy of China’s bond market opening to the outside world, and facilitate foreign institutional investors to allocate yuan bond assets, China’s top finance regulators – the People’s Bank of China, China Securities Regulatory Commission, and the State Administration of Foreign Exchange – jointly drafted the proposal.

So, there will be a short period for ‘public comment’ before the draft becomes law.

Clarification on foreign institutions

The new proposed rules have a lot to say about the requirements for foreign institutions keen to enter the market. They clarify that the scope of foreign institutions includes sovereign institutions such as foreign central banks, monetary authorities, international financial organisations, and sovereign wealth funds, as well as commercial banks, insurance companies, and insurance companies legally registered outside China.

Other players included are foreign commercial institutions such as securities companies, fund management companies, futures companies, trust companies, and asset management institutions.

The way for foreign institutions to enter the market is consistent with the current regulations, that is, sovereign institutions must submit applications to the People’s Bank of China, and commercial institutions must submit applications to the Shanghai head office of the PBoC (central bank). 

Foreign institutions no longer need to submit applications in the name of products and do not need to enter market areas ‘one by one.’

According to a report in Economic Daily, the drafting of the rules is mainly to unify access management and capital management, in accordance with the principle of “one Chinese bond market with the same set of standards and same rules (for all investors)”.

They want to unify access standards, optimise the market entry process, and encourage foreign institutions to act as medium to long-term investors in China’s bond market, it said.

Foreign institutional investors who have entered the interbank bond market can invest in the exchange bond market directly or through interconnection.

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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