China’s central bank has issued detailed guidelines on trading the China interbank bond market (CIBM) via Bond Connect – a move expected to boost investor confidence ahead of the go-live of the mutual market access scheme in July.
In a statement posted on Thursday (June 22) on its website, the People’s Bank of China (PBoC) listed the types of investors eligible for the trading link and the range of bonds they can invest in. It also explained the beneficial ownership mechanism and how investors can trade using foreign currencies within the programme.
“You’ll see an awful lot of activities on day one [July 3] in terms of ceremonial trades,” said Barnaby Nelson, head of investors and intermediaries for Northeast Asia at Standard Chartered, at a press event on Wednesday.
When Bond Connect was first approved on May 16, investors had various concerns about the uncertainty of the rules. But as more details have emerged, these issues have been gradually resolved, Nelson told AsianInvestor earlier this month.
The PBoC has now confirmed that foreign investors would be the beneficial owners of the bonds they invest in, while the trustee was the nominee on behalf of the investors.
Beneficial ownership had likewise been the biggest question for foreign investors using the Stock Connect, QFII and RQFII schemes, but it has since been clarified. Recognition of beneficial ownership is necessary for some asset managers to satisfy the rules of their home jurisdiction, such as firms running Ucits funds.
The central bank also confirmed that investors would be able to trade Bond Connect using renminbi and foreign currencies. For the latter, investors must set up a renminbi account with a qualified settlement bank in Hong Kong specifically for Bond Connect investment.
RMB generated from sales of bonds can only be used to continue invest through the link. For other purposes, investors must switch the renminbi back into foreign currency through the Hong Kong settlement bank.
Clarity on rules
Clarification of the rules, especially on repatriation arrangements for foreign currency, will be key to attract flows.
The complexity of China access channels and the rules governing them was cited as the main factor affecting investors' mainland allocations, according to Standard Chartered’s RMB Investor Survey, which was released on Thursday and polled some 900 investors in March. Nearly a third (31%) cited this as an issue, with the other two biggest concerns being FX risk (with 25% citing this) and repatriation of funds (13%).
“The top three are capital-related concerns,” Nelson noted. But he said he was confident that capital controls would be relaxed over the next 12 months. After all, he added, the tighter controls imposed last year were focused more on outflows from domestic investors than on repatriation of foreign investor capital.
In respect of participant eligibility, the PBoC confirmed that all investors allowed to open CIBM accounts could participate in Bond Connect. This includes sovereign entities, asset owners, asset managers, banks and securities firms*.
They can buy all types of bonds on the CIBM, which include central and local government bonds, government-backed agency bonds, policy bank bonds, commercial bank bonds, non-bank financial institution bonds, debt financing tools offered by non-financial enterprises, enterprise bonds and asset-backed securities.
Investors can also subscribe to the primary offerings of bonds issued on CIBM and trade bonds on the secondary market. They can currently only trade cash bonds, but the scope will be gradually expanded to bond repurchase, bond lending, bond forwards, interest rate swaps and forward rate agreements.
Other operational bodies of the programme, including e-trading platform and trustees, will issue other details on its implementation after getting approval from the China and Hong Kong regulators, the PBoC said.
* Eligible investors include central banks or monetary authorities, sovereign wealth funds, international financial organisations, qualified overseas institutional investors (QFII) and their renminbi equivalents (RQFIIs), commercial banks, insurance companies, securities firms, fund management firms, asset management firms and other long-term institutional investors such as pension funds, charitable funds and endowment funds.