A recent announcement by the People’s Bank of China (PBOC) relaxes the rules which apply to foreign institutional investors accessing the domestic bond market in China. The Announcement on Issues relating to Investment by Foreign Institutional Investors in Interbank Bond Market (Announcement No. 3) (the Announcement) was released on 17 February 2016 with immediate effect.
Prior to the Announcement, access to China’s interbank bond market (CIBM) was limited to Foreign Central Bank-Type Institutions (including foreign central banks or monetary authorities, international financial organisations and sovereign wealth funds), qualified foreign institutional investors (QFIIs) and RMB qualified foreign institutional investors (RQFIIs).
Following the Announcement, most types of overseas financial institutions will be eligible to invest in the CIBM, including commercial banks, insurance companies, securities companies, fund management companies and asset management companies, and medium to long term investors such as pension funds and charity funds. Whilst there are no specific guidelines or eligibility criteria published for foreign institutional investors to purchase CIBM bonds, we would not expect PBOC prior approval or quotas to be required.
How can investment funds authorised in Hong Kong invest in the CIBM?
Below are our responses to some questions which fund managers have been asking:
- Has the SFC published any guidance in relation to the Announcement? Not yet, but we would expect some circulars or FAQs to be published by the SFC in due course.
- When can an authorised fund start investing in the CIBM? We would expect the system to operate similar to RQFII, but the main difference is that no quota will be required.
- What documentation will need to be entered into? We would expect that as a minimum, a PRC Custodian and/or a PRC Settlement / Clearing Agent will need to be appointed. Existing RQFII licence holders could probably take advantage of the custodial and settlement arrangements they already have in place. However, fund houses that are new to the market will need to negotiate such arrangements with PRC service providers.
- What (if any) disclosures will need to be made in fund documentation? As a starting point, there should be a brief description as to how the CIBM operates, its key features and what it is about. Depending on the extent of investments in the CIBM, we expect a varying degree of information disclosures will be required, in a similar fashion to the treatment of funds that access shares via Shanghai-Hong Kong Stock Connect.
- What (if any) disclaimers will need to be included in fund documentation? If a fund’s investments in the CIBM are below 10% of its NAV, the disclosures would be relatively light. In contrast, if a fund invests 30% or more of its NAV in the CIBM, the disclosures would be more substantial. In particular, the key risks relating to investments in the CIBM will need to be included in the fund’s Key Facts Statement. Some of the key risks would include:
- Liquidity risk
- Interest rate risk
- RMB currency risk
- Credit risk, credit rating risk in the PRC and downgrading risk
- Valuation and settlement risk
- Risks relating to investments in Urban Investment Bonds (if applicable)
- PRC tax risk, regulatory risk
Further guidance expected
Given the amount of interest from foreign investors generated by the Announcement, it is anticipated the PBOC will issue further guidance in due course.