PBOC Further Opens Interbank Bond Market to Foreign Institutional Investors

On 17 February 2016, the People’s Bank of China (“PBOC”) issued the Announcement on Relevant Matters concerning Further Improvement in the Investment in the Interbank Bond Market by Foreign Institutional Investors, which further opens China’s interbank bond market to foreign institutional investors. Interbank bonds are mainly comprised of government bonds, central bank notes, financial bonds and non-financial corporate bonds issued by China’s central state owned enterprises.

Under the announcement, a “foreign institutional investor” refers to a qualified foreign:

  • Commercial bank, insurance company, securities company, fund or asset management company or other financial institution (as well as investment products sold by a financial institution).
  • Pension fund, charitable fund, endowment or other medium and long term institutional investor recognised by the PBOC.
  • Other qualified financial institutions, including:
    • Institutional investors from Hong Kong, Macau and Taiwan.
    • Foreign central banks, international financial organisations and sovereign funds.
    • Qualified foreign institutional investors (“QFII”) and Renminbi QFII.

Foreign institutional investors generally must commission a qualified settlement agent to engage in interbank bond trading and settlement, though there appears to be an exception for foreign central banks, international financial organisations and sovereign funds, which are permitted under separate PBOC rules to directly conduct interbank bond trades and settlement. Most commentators are waiting for the PBOC to clarify this point.

The announcement requires a settlement agent to determine whether a foreign institutional investor is qualified. Once qualified and registered (by its settlement agent) with the Shanghai branch of the PBOC, a foreign institutional investor may conduct interbank bond trading and settlement without PBOC approval and without reference to the prior quota system. Those requirements were imposed by prior rules that are inconsistent with the provisions in the announcement and thus no longer apply.

Market Reaction

Harvey Lau, Partner, Baker & McKenzie, Shanghai

“The announcement eventually may help stimulate inbound investment and promote RMB internationalisation, but qualified foreign institutional investors (other than QFII and Renminbi QFII) still need to wait for the detailed implementation rules to be published to understand the foreign exchange control aspects of this investment opportunity. A recent press release by the State Administration of Foreign Exchange (“SAFE”) dated 22 March 2016 confirmed that SAFE would enact and release detailed operational rules on the announcement, although there was no fixed timetable as to when they would be available.”

Action Items

General Counsel for institutional investors qualified under the announcement, especially non-QFII or Renminbi QFII investors, will want to become familiar with the announcement, as well as other related and future developments, to determine if the announcement presents additional investment opportunities and how best to exploit those opportunities.