1. Which regulators are relevant?
The Chinese bond market comprises two markets: an exchange bond market and the Inter-bank Bond Market. As a general rule, the exchange bond market is regulated by the China Securities Regulatory Commission (“CSRC”) while the Inter-bank Bond Market is regulated by the National Association of Financial Market Institutional Investors (“NAFMII”) under the supervision of the People’s Bank of China (“PBOC”).
Issues of onshore RMB bonds by foreign entities to-date have been primarily undertaken in the Inter-bank Bond Market. In the Inter-bank Bond Market, the PBOC approves the issue of onshore RMB bonds by foreign financial institutions whilst NAFMII (with guidance from the PBOC) approves for registration issues of onshore RMB bonds by sovereign issuers and non-financial enterprises (corporates).
2. Which regulations apply?
The types of entities that have issued onshore RMB bonds in the Inter-bank Bond Market to-date are:
- international development institutions – International Finance Corporation and Asian Development Bank;
- financial institutions – Bank of China Hong Kong, HSBC and Standard Chartered Hong Kong;
- sovereigns – Republic of South Korea and Province of British Columbia;
- non-financial enterprises – Daimler and China Merchants Group (Hong Kong).
There are currently no specific PRC regulations, rules or guidelines that regulate the offering of RMB bonds by foreign financial institutions, sovereigns or non-financial enterprises in the Inter-bank Bond Market. Measures do however exist for international development institutions (see the “International Development Institutions RMB Bond Issuance Interim Measures” updated on 16 September 2010 which regulate issues of onshore RMB bonds by international development institutions (“IDI Interim Measures”)). The absence of specific applicable law, means that the approval process is currently conducted on a “pilot” basis meaning bespoke approvals, and negotiation of issuance procedures with the PBOC and NAFMII.
But, it can be reasonably expected that:
- the principles which support the rules and regulations governing the issue of onshore RMB bonds by equivalent China entities apply to issuers in offering of RMB bonds in the Inter-bank Bond Market (including sovereign issuers); and
- approval by the PBOC or registration with NAFMII is likely to be subject to an undertaking by the issuer to comply with certain PRC law and thereby render onshore issuance subject to PRC regulator oversight.
We expect the PBOC and NAFMII will issue regulations, rules and guidelines that regulate the offering of RMB bonds by foreign issuers in the Inter-bank Bond Market in the near future.
3. How long does it take to issue onshore RMB bonds?
The starting point is to obtain approval from the PBOC to issue onshore RMB bonds (in the case of financial institutions) or registration of the issue with NAFMII (in the case of sovereign or corporate issuers). The time taken for approval will vary according to the issuer’s circumstances and understanding of domestic PRC issuance practice.
Approval is followed by documentation of the issue, roadshow, pricing and settlement.
Given the need for bespoke issuer approval (and regulator discretion in approving issuer candidates), it is difficult to predict precisely how long it might take to issue onshore PRC bonds but, as a guide, the issues by the Republic of Korea and Province of British Columbia each took less than three months in total.
4. What are the steps to be taken in an onshore issue of RMB bonds?
The steps to be taken are:
- application for approval to issue onshore RMB bonds
- submit draft documents to PBOC and NAFMII (including the offering circular, audited financial statements, underwriting agreement, rating reports and draft legal opinions)
- approval on issuance or registration is granted
- admission to the onshore clearing house and book building exchange
- publication of issuance plan and bond terms
- pricing, followed by settlement and trading.
5. What are the implications of accepting PRC as the governing law of the bonds?
The legal system of the PRC is based on the civil law system. It consists mainly of codified law. The PRC does not have a formal system of judicial precedent. As such, whilst the Supreme People’s Court and the Supreme People’s Procuratorate are authorised to make binding interpretations of laws, judgments made by one PRC court are not binding on another PRC court.
There is no substantive difference between the rights and obligations of the parties to a bond governed by PRC governing law and a bond governed by the laws of a western jurisdiction such as England. The obligations of an issuer of a bond governed by PRC law should be valid, binding and (subject to the terms of such bond) enforceable under PRC law in the same way as the obligations of an issuer of a bond governed by English law.
There are, however, differences between PRC law and the laws of common law jurisdictions. None of these differences are immediately relevant to the issue of an onshore RMB bond.
Under PRC law, parties to “foreign-related” contracts are generally free to select a preferred dispute resolution forum to govern their contracts, provided their choice is consistent with PRC law. This means that the issuer is given some flexibility in deciding the precise terms of it agreeing to arbitrate disputes (such as the language in which proceedings are conducted and the nationality of the arbitrators). The seat of the arbitration and the rules which govern the arbitration are likely to be in Beijing, and the China International Economic and Trade Commission Arbitration Rules.
6. How does an issue of bonds in the PRC differ from a typical offshore issue?
The key differences between onshore and offshore issuers of bonds are:
- need for approval to issue by the PBOC and NAFMII
- the language used in issue documents is Chinese and PRC law will govern the terms and conditions of the bonds;
- a rating given by an onshore rating agency is likely to be required
- disclosure in the offering circular may be a little more extensive in China because investors are not as familiar with the issuer as in offshore markets
- bonds are evidenced by a central depository electronic record rather than in registered or bearer form.
Otherwise, the practice and procedure for issuing bonds in China is substantially similar to that which applies offshore.
7. Can an issuer issue onshore RMB bonds using its Euro Medium Term Note Programme?
Given that an onshore RMB bond issue:
- is documented in Chinese
- contains terms and conditions different in some respects to those that apply in the EMTN Programme (for example, having to choose PRC governing law)
- is subject (perhaps) to more extensive disclosure compared to offshore debt programmes
- requires PBOC or NAFMII approval to establish a programme limit which applies for a particular duration,
issuers will create a China-focused standalone bond or onshore PRC bond programme.
8. Can bond proceeds be remitted offshore from China?
China maintains strict capital controls such that the remittance of bond proceeds from China to an overseas country would normally require PRC regulator approval. In the case of an onshore issue of RMB bonds, a key aspect of the approval process is to obtain consent to remit the bond proceeds (in RMB) from China to an offshore destination (such as Hong Kong). An issuer may decide to instead keep the proceeds in China for example, to invest in the Inter-bank Bond Market (this is not currently available to foreign corporates).
An issuer that wishes to convert the RMB bond proceeds into a foreign currency must do so offshore.
Payments of principal and interest on the bonds can be remitted into China in RMB.
9. Must an offshore credit rating be obtained?
A rating by an onshore rating agency is required for onshore issuers and is generally required for offshore issuers – onshore ratings were obtained by BOC Hong Kong, HSBC, Standard Chartered Hong Kong, Daimler, China Merchants Group (Hong Kong) and the Republic of Korea for their onshore RMB bonds. The Province of British Columbia is rated by international credit rating agencies as triple-A and was exempted from obtaining a local rating.
10. Are issuers required to restate their accounts in accordance with PRC generally accepted accounting principles (“PRC GAAP”) or to have their accounts audited by a qualified PRC auditor?
There is currently no rule that requires a sovereign, financial institution or corporate issuer to restate its accounts in accordance with PRC GAAP or to have those accounts audited by a PRC auditor.
But an indication of the regulatory expectation is set out in the IDI Interim Measures (which only apply to international development institutions) which require:
“International Development Institutions that intend to issue RMB Bonds should prepare financial reports in accordance with Chinese accounting standards for enterprises, unless the accounting standards currently used by such International Development Institutions have been recognised as equivalent to Chinese accounting standards by MOF. International Development Institutions that intend to issue RMB Bonds should have their financial reports audited by an appropriately qualified accounting firm in China, unless the country or region in which the International Development Institution is based has signed an agreement with the MOF regarding the equivalence of their regulatory regimes for audits conducted by registered accountants.”
At least in the case of one sovereign issuer (Province of British Columbia), the PBOC waived compliance with this requirement. We would expect it to do so for future applications by sovereign issuers.
The more difficult question is whether this requirement will apply to financial institutions and corporate issuers. Restatement of accounts and re-audit by a PRC auditor is a time-consuming and expensive process, which requirement (if insisted upon) is likely to impede issues of onshore RMB bonds by those issuers.
KWM is working with its clients and the PRC regulators to examine alternatives to the strict application of this requirement. It is expected that there may be a resolution in the short term.
KWM’s experience on recent issues of onshore RMB bonds is that, despite a handful of differences to the way in which bonds are issued offshore, the practices and procedures in China for issuing bonds are substantially similar. Issuers should take comfort that the recent issues of onshore RMB bonds by foreign entities have proceeded efficiently and without significant unforeseen difficulties.