In a recent announcement, the People’s Bank of China (PBOC) greatly relaxed the rules which are applicable to foreign institutional investors accessing the Chinese inter-bank bond market.
Following this announcement, most types of overseas financial institutions (commercial banks, securities companies, fund management companies and asset management companies) will no longer be required to seek pre-approval from the PBOC or obtain quota to invest in the country’s Rmb 35 trillion ($5.4 trillion) inter-bank bond market. The new rules do not, however, apply to hedge funds.
Provided that the relevant foreign institutional investors satisfy certain eligibility requirements, which are primarily focused on their regulatory record in the last three years and on possessing suitable risk management systems, they will be able to access the inter-bank bond market under these new rules. Onshore settlement agents (qualified commercial banks) will determine whether a foreign institutional investor has met these requirements and will trade and settle the bonds on their behalf. We understand that foreign central banks and monetary authorities will continue to be able to trade through their own bond account. The onshore settlement agent will also assist with payments in respect of both the principal and coupon on bonds.
This announcement follows closely on from the announcement in July 2015 which permitted foreign central banks, sovereign wealth funds and global financial organisations to, upon registration with the PBOC, trade domestic bonds, interest rate swaps and repurchase agreements more easily.
This announcement by the PBOC dramatically increases the scope for foreign financial institutions to invest in the inter-bank bond market in China and is the latest move by the Chinese authorities to integrate more fully with global financial markets.