2 March, 2016
On 17 February 2016, the People’s Bank of China (“PBOC”) published the Announcement on Issues relating to Investment by Foreign Institutional Investors in Interbank Bond Market (Announcement No. 3, the “2016 Announcement”), which broadens foreign access to the Chinese interbank bond market (the “CIBM”). The announcement takes immediate effect.
Background
PBOC approved the first foreign institutional investor in the CIBM, Pan Asia Fund, in April 2005. However, PBOC approved very few additional foreign institutional investors between then and August 2010, at which point PBOC rolled out a pilot scheme allowing foreign institution investors to trade on the CIBM up to the amount of monetary quota granted to them by PBOC. The permitted foreign institutional investors include: (i) foreign central banks or monetary authorities, (ii) RMB settlement banks in Hong Kong and Macau; and (iii) cross-border RMB settlement participating banks in Hong Kong and Macau. Under the pilot scheme, approved foreign institutional investors may trade and settle interbank bonds directly (in the case of central banks and RMB settlement banks) or through an onshore settlement agent. Since the introduction of the pilot scheme, PBOC has approved a series of foreign institutional investors in the CIBM, on a regular basis.
In December 2011, Hong Kong subsidiaries of Chinese fund management firms and securities companies, whichhad been granted the status of RMB qualified foreign institutional investors (“RQFIIs”) by the China Securities Regulatory Commission (CSRC), were permitted to invest in the CIBM with PBOC‘s approval. In March 2011, PBOC further expanded the scope of foreign institutional investors by allowing all RQFIIs and qualified foreign institutional investors (“QFIIs”) to apply for approval and quota to invest in the CIBM through a Chinese settlement agent.
In an official notice in July 2015 (the “2015 Notice”), PBOC exempted foreign central banks, monetary authorities, international financial organizations and sovereign wealth funds from the requirement for PBOC approval and quota restriction on RMB investment in the CIBM. Instead, such foreign institutional investors are permitted to invest any amount in the CIBM through an onshore settlement agent, once a filing with PBOC has been completed.
Highlights of the 2016 Announcement
Further Expanded Scope of Foreign Institutional Investors
The 2016 Announcement permits most types of foreign institutional investors to invest in the CIBM, including “commercial banks, insurance companies, securities firms, fund management companies and other asset management institutions”, their investment products, “pension funds, charity funds, endowment funds” and “other mid-term or long-term institution investors recognized by PBOC” (the “Foreign Institutional Financial Investors”). Previously only a few specified types of foreign institutional investors, mainly state-backed banks and funds, international organizations, QFIIs and RQFIIs were permitted.
However, the 2016 Announcement specifies that the Foreign Institutional Financial Investors must be “mid-term or long-term investors recognized by PBOC”, which empowers PBOC to prohibit those foreign institutional investors that it considers short-term speculators from having access to the CIBM or to impose restrictive measures on their access. We expect PBOC to issue guidance in the future as to the definition of “mid-term or long-term investors” for these purposes.
Removal of Quota Restriction
The 2016 Announcement further exempts all the Foreign Institutional Financial Investors permitted to invest in the CIBM from the restriction of a quota, which exemption was previously only available to foreign central banks, monetary authorities, international financial organizations and sovereign wealth funds under the 2015 Notice. The Foreign Institutional Financial Investors now enjoy greater freedom to structure their positions and investment strategy in the CIBM. However, it remains to be seen whether an investment in CIBM would consume RQFII or QFII quota and how it would interrelate with the new QFII quota regime published by the State Administration of Foreign Exchange (SAFE) in February 2016.
Filing Replaces Prior Approval
Prior to the 2016 Announcement, PBOC approved applications from foreign investors to invest in the CIBM on a case-by-case basis, other than for the foreign central banks, monetary authorities and other entities exempted under the 2015 Notice. Under the new regime, Foreign Institutional Financial Investors may start investing once they have lodged an investment filing form with PBOC, either directly or through an onshore settlement agent. The content of the investment filing form is yet to be published but, as a reference point, the information required to be provided in the prescribed filing form under the 2015 Notice includes the source of funds, expected volume of investment, investment strategies, expected investment products, selected settlement agent and introduction of investment manager. We would expect the filing to be required under the 2016 Announcement to follow a similar format.
Lowered Qualification Requirements and Simplified Procedures
Generally speaking, a Foreign Institutional Financial Investor is qualified to invest in the CIBM if it (i) is duly incorporated; (ii) has sound corporate governance, internal controls and legal compliance records; (iii) has legitimate sources of funds; and (iv) has the capacity to identify and bear the risks of investment.
The 2016 Announcement delegates responsibility for the review of a Foreign Institutional Financial Investor’s eligibility to the settlement agent, so that they do not have to apply to PBOC.
Our Observations
Investment in the CIBM Made Easier
The removal of major hurdles for investment in the CIBM, in particular the removal of quota restriction and prior approval, will be of significant benefit to a substantially wider pool of foreign institutional investors who may seek to invest in the CIBM. Although the detailed implementing rules and the investment filing form are yet to be published, the 2016 Announcement marks a significant step towards opening up the CIBM.
Promotion of Foreign Funds Inflow and Globalization of RMB.
The 2016 Announcement also demonstrates the Chinese government’s determination to attract capital inflow and buck the recent trend of capital outflow by opening up the relatively high-yield CIBM to mid-term and long-term foreign institutional investors. The Chinese government may also expect the purchase of RMB-denominated assets, such as interbank bonds, to help internationalize RMB as a global currency.
For further information, please contact:
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
