China’s financial opening-up has made significant achievements with its steady development. China has been forging ahead with ruled-based opening up in financial industry with higher standard, since the 14th Five-Year Plan (2021-2025) began.
A series opening-up measures has been carried out, particularly in the bond market. In 2022, foreign institutional investors are welcomed and encouraged to enter into the exchange bond market, which extends their investment scope in China. Meanwhile, the authorities have kept promoting the opening-up of the inter-bank bond market. In 2022, the People’s Bank of China (hereinafter the PBOC)issued the Provisions on the Management of Funds Invested by Foreign Institutional Investors in China's Bond Market (hereinafter as No.258  of the PBOC and the SAFE, Circular 258), jointly with the State Administration of Foreign Exchange (hereinafter the SAFE), unifying the rules on fund management in the bond market. It clarifies that foreign institutional investors may remit in any currency to invest in the PRC bond market. Further, the PBOC Work Conference in 2023 highlights the principle of continuously optimizing the international financial cooperation and opening up.
The favorable policies attract the attention of some overseas investors and recently, we received more relevant inquiries from overseas investment institutions. There are no doubts that overseas investors are highly interested in China's capital markets. However, they still have concerns about the enforceability of the supporting policies and measures.
Given that, we are trying to introduce the ongoing financial opening-up policy in detail in articles in this series, by systematically elaborating and analyzing the approaches and schemes for overseas investors’ entering PRC bond market, stock market and foreign exchange market.
Overview of CIBM Direct
CIBM Direct refers to the China inter-bank bond market direct investment mode (hereinafter the direct mode), which is an innovative financial infrastructure that enables foreign financial institutions to complete the quotations process directly with the counterparties, without any settlement agents. CIBM Direct have been officially carried out since September 1st 2020, within the framework of the Notice on Trial Operation of CIBM-Direct Trading Service for Overseas Institutional Investors (Document Number: No.224  Of CFETS &NIFC, hereinafter Circular 224). So far, CIBM Direct has become one of the important ways for foreign financial institutions to participate in the transactions in the PRC financial market.
In contrast to the traditional China inter-bank bond market (hereinafter CIBM) transaction mode, in which the quotations process must be initiated through a settlement agent, CIBM Direct, as a supporting infrastructure resulting from financial opening-up, simplifies the process by removing the steps of communicating with the domestic agents, which is more convenient and efficient for the overseas investors.
Under the direct mode, China Foreign Exchange Trading System and National Interbank Funding Center (hereinafter CFETS & NIFC) are connected with the overseas trading platforms (such as Tradeweb, Bloomberg and MarketAxess, etc.), enabling investors to quote in the platforms that they are accustomed to. Further, Dealer Pay, a common practice in international payment, can be applied now.
Generally speaking, the specific rules of CIBM Direct are applied on the basis of the fundamental rules of CIBM. Under this circumstance, this article will interpret and analyze the legal issues and practices concerning foreign commercial institutional investors' access to the bond market through CIBM Direct from the following aspects: Application & Qualification, Trading Rules, Fund & Account Management and Taxation Policy.
1. Qualification & Application
Only those who are qualified investors in CIBM can invest via the direct mode. Therefore, overseas investors shall first complete the relevant application for account opening and then proceed to CIBM Direct application procedures.
According to Circular 224, Foreign Institutional Investors, as defined in the Announcement on Matters concerning the Issue of Further Improving the Investment in the Interbank Bond Market by Foreign Institutional Investors, (No. 3  of the PBOC, hereinafter Circular 3) are permitted to participate in CIBM investment, specifically including---
- Foreign financial institutions
- Qualified Foreign Institutional Investors (QFII), and
- RMB Qualified Foreign Institutional Investors (RQFII).
1.1.1 Foreign institutional Investor
Foreign Institutional Investors in Circular 3 refers to as follows:
- Commercial banks
- Insurance companies
- Securities companies
- Fund management companies and other asset management institutions,
- Other financial institutions registered and established,
- Financial products issued by the aforesaid financial institutions
- Pension funds, charitable funds, donated funds, among others medium and long-term institutional investors as approved by PBOC.
In accordance with Circular 3, foreign institutional investors are divided into commercial and sovereign institutional investors. This article relates to foreign commercial institutions only.
Foreign institutional investors who are qualified for CIMB shall meet the following requirements:
- being legally registered and established under laws of its country or region;
- embracing a robust governance structure and internal control system, with proper operating practices and no records for severe penalties for illegal or non-compliant conduct related to bond investment in the past three years;
- ensuring lawful source of its funds;
- having capacity of risk identification and relevant risk tolerance for investing bond; and
- others conditions required by PBOC
Certification materials include:
- Business license, financial business license and other permits required as local laws and regulations in the countries or regions of the investors;
- Records or statements proving that it has not been subject to any severe punishment by the regulatory authority due to violations of laws or regulations in bond investment business within the latest three years as well as the documents in relation to rules for internal control system and governance structure;
- Financial reports or working papers for proving the source of funds and the risk-taking capability;
- Financial situation statement for proving its risk-taking capacity, and a confirmation statement for its willingness to take relevant risk resulting from the bond market;
- Other materials as required.
1.2.1 Application Process and Relevant Documents
According to the guidance published by the PBOC, the application process for foreign commercial institutional investors to access to the CIBM is as follow:
A. Engaging Settlement Agents
Foreign Institutional Investors shall sign and enter into the Bond Agent Trading and Settlement Agreement with settlement agents. (the list of the agents can be referred to http://shanghai.PBOC.gov.cn/fzhshanghai/113595/4658618/index.html)
Subsequently, the agent shall fill the application to the PBOC Shanghai Head Office on behalf of the investors by submitting the Filing Form for Foreign Institutional Investor Investment in China Interbank Bond Market and the Bond Agent Trading and Settlement Agreement. Within 20 working days after receiving the application, the Shanghai Head Office would issue the Filing Notice of Market Access to the Chinese Inter-bank Bond Market, which would be the completion of the filling.
However, it should be noted that the foreign institutional investors would be required to update the proposed investment scale and others relevant information, if they remit less than 50% of its proposed investment scale within 9 months from the date of completion of the filing.
- Bond Agent Trading and Settlement Agreement (Model Version)
provided by the financial market management department of PBOC Shanghai Head Office http://shanghai.PBOC.gov.cn/fzhshanghai/113595/3355891/index.html
- Filing Form for Foreign Institutional Investor Investment in China Inter-bank Bond Market
Appendix 1 and 2 of Business Process for Foreign Commercial Institutional Investors to Enter into the China Inter-Bank Bond Market
B. Foreign Exchange Registration
According to Circular 258, the funds invested by foreign institutional investors shall be recorded in the SAFE. In this regards, foreign investors shall designate a custodian or a settlement agent to go through the process via the SAFE’s capital account information system with the Filing Notice of Market Access to the Chinese Inter-bank Bond Market or any other equivalent document(s) within 10 working days upon the completion of the filing.
C. Networking and Account Opening
The settlement agent shall apply for networking or account opening to CFETS, China Central Depository & Clearing Co., Ltd. (hereinafter CCDC) and Shanghai Clearing House (hereinafter SHCH) respectively. CFETS, CCDC and SHCH shall begin to process the application and complete the procedure within 3 working days if the documents are complete and correct; otherwise, the settlement agent will be informed of the inadequacies.
- Filing Notice of Market Access to the Chinese Inter-bank Bond Market
(issued by the PBOC Shanghai Head Office) https://ibrs.chinamoney.com.cn/IBRSW/
- Application Form of a Foreign Institutional Investor
- Letter of Commitment for Account Opening / the signing page of business agreement
1.2.2 Procedure and Documents of CIBM Direct
Prior to trading, the settlement agent, on behalf of its foreign client, shall submit a Commitment Letter on Compliance and Knowledge of Trading Risk (see Appendix 1 of Circular 224) and Application Form for Trading Service about basic information of investors and settlement agents (see Appendix 2 of Circular 224) to CFETS.
Circular 224 specifies the detailed rules for trading via CIBM Direct. Generally speaking, it is consistent with the basic rules of the interbank bond market.
2.1 Trading Varieties and Mechanism
2.1.1 Trading Varieties
Circular 224 highlights that CIBM Direct is a new approach for bond trading, including those in relation to treasury bonds, local government bonds, central bank bonds, financial bonds, corporate credit bonds, inter-bank deposit, asset-backed securities, standardized notes and other various types of bonds traded and circulated in the inter-bank bond market. Further, according to Circular 258, tradings in relation to bond lending, bond forward, forward rate agreement, interest rate swap and other transactions for purpose of hedging are also acceptable for CIBM Direct Scheme.
2.1.2 Trading Mechanism
The investors may initiate the bond trading with domestic market makers by an offer invitation with demanded quantity only. Market makers shall reply subsequently with a tradable price via the CFETS system. After the foreign investors confirm the price, a transaction can be concluded. As mentioned above, some of the overseas trading platforms, such as Tradeweb, Bloomberg and MarketAxess, are connected with CFETS to enhance the convenience for foreign investors.
2.2 Basic Rules
The minimum amount of quotation request shall be 10,000 yuan, with the tick scale of 10,000 yuan. Compartment deal and package deal are both applicable.
2.2.2 Trading Time
Trading time is the same as that of inter-bank bond market, namely 9: 00-12: 00 am Beijing time and 13: 30-16: 30 pm Beijing time on each trading day. The CFETS will specifically notify if there are any adjustments.
2.3 Settlement Arrangement
- Payment System: Real-Time Gross Settlement (RTGS)
- Settlement Method: Delivery Versus Payment (DVP)
- Settlement Speed: T+0, T+1, T+2 and T+3 are all available.
When a transaction concluded, the settlement agent may view and download the transaction information in real time and complete the settlement.
Foreign institutional investors shall pay the trading fee via the settlement agent pursuant to the Operating Rules for Overseas Institutions on Use of CNY for Investment in the Interbank Bond Market (No.251  of the CFETS).
Market makers shall pay the trading fee pursuant to Notice No.302  of the CFETS.
The overseas platform shall be paid in accordance as the CFETS’s requirement due to the service it provides.
In the next article:
Access to PRC Capital Martkets:CIBM Direct(II), we would like to focus on account management and taxation in relation to CIBM Direct.
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