On February 17, 2016, the People’s Bank of China (“PBOC”) issued the Announcement No. 3  regarding the access of foreign entities to the Chinese inter-bank bond market. At a first glimpse it may seem that this announcement may have limited applicability to entities doing business in China or for normal retail investors, however the impact of this change may be a long lasting one and it is another hint on the likely path of the Chinese financial market and capital accounts in the near future.
Not only this measure may represent investment opportunities to institutional investors targeting the Chinese market, as China’s bond market is now the third largest in the world behind United States and Japan at an estimated value of USD 4.24 trillion (Goldman Sachs Global Liquidity Management Study on China’s Bond Market of October 3, 2015), but it also has deep connections with macro economic tendencies in China.
Observers of the Chinese market are in anticipation to a further liberalization of the capital account and increased possibility for Chinese investors to allocate assets abroad. The latest statement on the matter was given this week by Pan Gongsheng, head of the State Administration of Foreign Exchange (“SAFE”) and deputy governor of the central bank, to the Shanghai Daily saying that amendments to the Qualified Domestic Institutional Investor program should be expected in order to facilitate cross-border investment and fundraising.
Under this light, we may identify the deep importance of the PBOC announcement as it assists the creation of liquidity for Chinese commercial banks to meet its capital requirements and it facilitates the trend to more credit to individuals and Chinese companies. It also has the objective of balancing the Chinese capital account as more regulatory opportunities are created for Chinese individuals, companies and financial institutions to invest abroad.
Before the latest PBOC announcement, the Chinese inter-bond market was restricted to (i) approved qualified foreign institutional investors and RMB qualified foreign institutional investors with prior approval from the PBOC and within their approved quotas (as amended in 2013); and (ii) foreign central banks, international financial institutions and sovereign funds upon registration with the PBOC (as amended in 2015), with preferential treatment to entities located in Hong Kong or Macau.
Pursuant to the latest amendments to the regime, financial institutions such as commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions lawfully registered and incorporated outside of China or others as recognized by the PBOC would be eligible for investment at the Chinese inter-bank bond market. This regime will be equally applicable for entities registered and approved in Hong Kong or Macau.
No registration procedure would be needed and the foreign institutional investor is required to appoint an onshore settlement agent for trading and settling and the local compliance burden towards PBOC will be borne by the local settlement agent. The onshore settlement agent also has a burden of screening for eligibility of market participants.
Foreign central banks, international financial institutions and sovereign funds continue to be subject to the PBOC Announcement No. 220 of 2015.
There are still many questions to be answered as this new opportunity will only come into effect with the issuing of detailed implementing rules.
We should expect then, as any regulatory development in China, for this river to be crossed stone by stone and for the convertibility of the RMB by Chinese investors and the capital outflow to be offset with measures that attracts capital from foreign institutional investors to China.