Foreign Investment Bulletin February, 2016（II）

3、No. 3 Announcement regulating investments by foreign institutional investors in interbank bond market
On February 17, 2016, the People’s Bank of China (“PBOC”) promulgated and implemented Announcement of the People's Bank of China [2016] No. 3 (“No. 3 Announcement”), allowing foreign institutional investors eligible under such Announcement to invest in the interbank bond market via authorizing settlement agents of the interbank bond market to conduct investments and settlement. The PBOC encourages foreign institutional investors to invest in the interbank bond market as long-and-medium-term investors, and exercises macro-prudential supervision over investment behaviors of foreign institutional investors.
3.1Background
In August 2010, to advance the trial of Renminbi settlement for cross-border trading, and to facilitate Renminbi repatriation, the PBOC issued the Yin Fa [2010] No. 217 Announcement, to conduct a trial on investments in the interbank bond market by foreign Renminbi settlement bank and other two institutions using Renminbi, which clarifies the entry requirements and investment quota approval system for foreign institutional investors investing in the interbank bond market. In March 2013, the PBOC issued the Circular on Matters Relating to Qualified Foreign Institutional Investors' Investment in the Interbank Bond Market which, based on the entry requirements and quota approval system as mentioned above, further includes more investment participants and clarifies that eligible investors are able to participate in the interbank bond market if approved as eligible investors by China Securities Regulatory Commission and with investment quota approved by State Administration of Foreign Exchange. In July 2015, to improve the efficiency of investment in the interbank bond market by the foreign central banks, monetary authorities, international financial institutions and sovereign wealth funds, the PBOC issued the Announcement of the People's Bank of China on Matters Concerning Trial Renminbi Investments by Foreign Central Banks, International Financial Organizations and Sovereign Wealth Funds in the Interbank Bond Market (Yin Fa [2015] No. 220, “No. 220 Announcement”), to implement an investment filing system for these three types of investment bodies, different from the entry requirements and quota approval system, and to enable relevant investment institutions to decide their own investment scale. The above developments indicate a trend that the interbank bond market is being gradually opened to foreign institutional investors.
Nevertheless, the 2015 Statistic Analytical Report of Bond Market issued by the China Securities Depository and Clearing Corporation Limited earlier this year noted that as of December 31, 2015, the bond holding rate by foreign institutions is around 1.72%, indicating that participation by foreign institutions is still relatively low.
3.2Legal Review
Compared with the above regulations, No.3 Announcement includes more foreign institutional investment participants and simplifies the management of market entry procedure.
First, while restating the continuing effectiveness of No. 220 Announcement, No. 3 Announcement clarifies that the interbank bond market will be opened to the following eligible entities: (i) financial institutions legally registered and incorporated outside China, including commercial banks, insurance companies, securities companies, fund management companies and other assets management companies; (ii) investment products issued by the above financial institutions legally to their clients; (iii) pension funds, charity funds, donation funds and other long-and-medium-term institutional investors approved by the PBOC; and (iv) the QFII and Renminbi Qualified Foreign Institutional Investors (“RQFII”).
Secondly, the No. 3 Announcement replaces the pre-entry approval system for foreign institutional investors to enter into interbank bond market with the post-entry filing system (note: although No. 220 Announcement introduces a filing system, No. 220 Announcement states that foreign institutional investors shall only conduct investment behaviors after competition of filing procedures). Furthermore, regarding whether investors satisfy the requirements for investment participants under the No. 3 Announcement, such issues will be handled by a settlement agent authorized for foreign institutional investors to provide investment and settlement services. The No. 3 Announcement states that foreign institutional investors shall authorize an interbank bond market settlement agent with the ability to conduct international settlement services to complete the investment filing procedures; and before authorization, the settlement agents are obliged to conduct examination and inspection of foreign institutional investors according the PBOC regulations and shall only accept the authorization by eligible foreign institutional investors.
3.3Next Step
The No. 3 Announcement fails to clarify the types of investment opened to foreign institutional investors and only states that eligible foreign institutional investors may conduct “transactions approved by the PBOC, such as cash bond transactions”, in the interbank bond market. In comparison, types of investment allowed to be conducted by central banks, international financial institutions and sovereign wealth funds in the No. 220 Announcement are clearer and broader. Hence, it is still unclear whether the types of investment eligible for central banks, international financial institutions and sovereign wealth funds are the same as those eligible under No. 3 Announcement for foreign institutional investors. Since the No. 3 Announcement states that the PBOC Shanghai Head Office shall formulate and implement rules based on such Announcement, it is hopeful that requirements that foreign institutional investors shall comply with to invest in the interbank bond market and specific types of bond investments can be further clarified with the implementation of the rules.