What is China Bond Connect?
China Bond Connect is a mutual market access scheme that was launched in July 2017. Using China Bond Connect, overseas investors can invest in the China Interbank Bond Market (CIBM) by virtue of mutual access arrangements concerning trading, custody, and settlement.
Prior to China Bond Connect, it was possible to invest in Chinese bonds under the QFII and RQFII frameworks. However, these require investors to obtain quotas under QFII and RQFII and impose restrictions on the amount of capital that can be remitted out of China. Under China Bond Connect such quota requirements and restrictions do not apply.
The ability to invest in Chinese bonds using China Bond Connect is good news for Irish UCITS and AIFs looking to diversify their portfolios and is particularly timely given the addition of Chinese bonds to global indexes such as Bloomberg Barclays Global Aggregate (a phased inclusion is set to begin in April 2019), FSTE World Government Bond Index and the JP Morgan Government Bond-Emerging Market Index. Additionally, in January S&P Global became the first non-Chinese credit ratings agency to be given approval to rate Chinese domestic bonds.
The approval of China Bond Connect follows assurances to the Central Bank that depositaries will be able to provide for the safekeeping of Chinese bonds and to discharge their safekeeping obligations under the UCITS or AIFMD regulations and any other conditions that may be imposed by the Central Bank.
Irish funds wishing to use China Bond Connect should review the rules and regulations that clarify matters such as access to the market, trading rules and settlement and the Handbook to Bond Connect Admission which provides guidance on admission to China Bond Connect to overseas investors.
In April 2019 the Central Bank updated its UCITS and AIFMD Q&A documents to clarify that before Irish funds acquire Chinese bonds through the Bond Connect infrastructure, the depositary of the fund must ensure that it (or an entity within its custodial network) can provide for the safekeeping of the bonds and also retain control over the bonds at all times.
It is anticipated that UCITS managers may need to update their UCITS prospectus to include the CIBM as a recognised market as per the UCITS Regulations. If new markets are required to be included in a prospectus, the depositary will be required to confirm to the Central Bank that it can provide for the safekeeping of Chinese bonds in the relevant markets.
The Central Bank’s approval of China Bond Connect will be a welcome development for Irish funds, especially due to the growth and size of bond markets in China and the efficiency that the China Bond Connect scheme offers.