An announcement made by the People’s Bank of China (“PBOC”) after the 2016 Chinese New Year marked a new stage for the opening up of the interbank bond market. On February 17, PBOC issued the Announcement [2016] No.3 (“No. 3 Announcement”) on matters relating to the investment by foreign institutional investors in the interbank bond market. In addition to the Foreign Central Bank-Type Institutions, QFIIs and RQFIIs, which are already permitted to invest, No. 3 Announcement now opens the interbank bond market to all qualified foreign institutions. It also cancels the related requirements on investment quotas and qualification examination required by the Circular of PBOC on Matters Relating to QFIIs' Investment in Inter-bank Bond Market (Yin Fa [2013] No. 69) and the Circular of PBOC on Matters Relating to the Implementation of the Measures for the Pilot Program of Domestic Securities Investment by RQFIIs. In addition, it introduces the same macro-prudential administration regime from the Circular on Matters Relating to Foreign Central Banks, International Financial Organizations and Sovereign Wealth Funds (Yin Fa [2015] No. 220) (“No. 220 Circular”) released by PBOC on July 14, 2015.
Foreign Participants
No. 3 Announcement extends the category of foreign institutional participants eligible to access the interbank bond market from the Foreign Central Bank-Type Institutions (including foreign central banks or monetary authorities, international financial organizations and sovereign wealth funds), QFIIs and RQFIIs to all qualified foreign institutional investors, although for the foreign institutional investors (“FIIs”) there remain certain qualification requirements. Subject to complying with the specific qualification requirements, the following are capable of qualifying as FIIs: (i) various financial institutions (including commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions) duly incorporated outside China; (ii) investment products issued to clients by the above financial institutions in accordance with the relevant laws and regulations; and (iii) pension funds, charitable funds, donated funds or other mid-and-long-term institutional investors recognized by PBOC.
Criteria with which an FII must comply in order to qualify as such shall include the following: (i) it is incorporated in accordance with the relevant national or regional laws in its place of domicile; (ii) it has an optimized governance structure and robust internal control systems; its operational conduct is fully compliant; and it has not been penalized by any regulatory authority for any violation of laws or regulations by its bond investment business in the preceding three years; (iii) its source of capital is lawful and in compliance with the applicable regulations; (iv) it has the capability and capacity to identify and tolerate risk and is aware of and can independently assume bond investment risks; and (v) it has satisfied any other conditions stipulated by PBOC.
Quota Limit
No. 220 Circular first removed the quota limit for the Foreign Central Bank-Type Institutions by providing that a Foreign Central Bank-Type Institution may at its sole discretion decide the scale of its investment. No. 3 Announcement has adopted such provision and extended its application to all qualified FIIs. This means that when investing in the interbank bond market as mid-and-long-term institutional investors, FIIs will have to abide by the macro-prudential administration regime but will not be restricted by the quota limit. We note it further stipulates that QFIIs and RQFIIs shall be governed by reference to No. 3 Announcement, which, from the literal meaning, indicates that any investment in the interbank bond market by such two types of institution will no longer be subject to any quota limit. According to No. 3 Announcement, PBOC’s Shanghai Head Office shall formulate the corresponding implementation rules. We envisage that the qualification requirements, quota limits and types of product for FIIs are likely to be further clarified in such implementation rules.
Type of Product
Under No. 220 Circular, Foreign Central Bank-Type Institutions may engage in the trading of physical bonds, bond repurchasing, bond lending, bond forwarding and other specified types of product. However, unlike No. 220 Circular, No. 3 Announcement does not explicitly list out all types of product available for trading by FIIs. It only provides that qualified FIIs may carry out bond trading recognized by PBOC (such as trading of physical bonds) in the interbank bond market. Other than trading of physical bonds, other types of product available for FIIs to invest in the interbank bond market are yet to be further clarified by PBOC.
Agent for Trading and Settlement
Whereas the Foreign Central Bank-Type Institutions may choose between two models (the agent model and the direct access model), No. 3 Announcement reserves the requirement for FIIs to use the agent model for trading and settlement when investing in the interbank bond market. This requirement specifies that FIIs shall entrust a settlement agent of the bond market capable of international settlement business for all trading and settlement.
Our Observations
No. 3 Announcement should have a significant positive impact on the long-term development of the interbank bond market by increasing the scale of foreign investment. From another point of view, No. 3 Announcement may also be interpreted as a policy response to the current wide-spread concern about “capital outflow”.