New China bond market rules more flexible than expected
New guidance and rules for accessing China’s interbank bond market (CIBM) have surprised market participants by their level of flexibility, but further clarification is still sought in respect of tax arrangements.
The moves, which took effect immediately, are expected to accelerate the inclusion of Chinese bonds in global fixed income benchmarks’, which would spur more foreign investment into the world’s third largest debt market.
On Friday evening, the People’s Bank of China (PBoC) released details for global investors’ registration for CIBM access, and the State Administration of Foreign Exchange (Safe) issued guidance on capital remittance related to CIBM investments.
Foreign investors’ capital remittances from the CIBM are allowed in either renminbi or foreign currency. Outbound capital repatriation must closely match inbound capital flow: the outbound flow cannot deviate more than 10% from the inbound amount.
Certain foreign institutions – namely central banks, sovereign funds and supranational entities – can now invest in onshore bond futures, forwards, swaps, options and bond lending, but other investors are not allowed to do so yet.
“The latest guidance offers much more flexibility than we or the market initially expected,” said Becky Liu, senior rates strategist at Standard Chartered in Hong Kong. The guidance comes after the PBoC removed the CIBM quota system in February, since when foreign investors have been awaiting clarification about capital remittance in respect of investments in this market.
And they still want clarification concerning tax arrangements around CIBM access, said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments. That said, the announcement shows that the Chinese government is committed to reforms to further open up the market, he noted. The point is that it remains unclear how capital gains from CIBM investments will be taxed.
Others have raised this issue in the past, and it had been a concern in respect of China's QFII and RQFII cross-border investment schemes until the Shanghai-Hong Kong Stock Connect was launched.
In any case, the new rules are expected to accelerate China bond market inclusion in global bond indices, particularly JP Morgan’s emerging-market government bond benchmark (GBI-EM). The latter is tipped to be the first among such indices to include Chinese bonds this year; the US bank started the review process in March. Meanwhile, Citi’s World Global Bond Index is tipped to come later, as it has stricter criteria for inclusion, as reported.
The CIBM programme is a new channel for foreign investors to access the $6.7 trillion onshore mainland debt market, representing 90% of the $7.4 trillion Chinese bond market. Global bond fund managers will still need QFII or renminbi-QFII quotas to access bonds traded on the Shanghai and Shenzhen exchanges.