Foreign institutions to benefit from interbank bond market

Foreign institutions will be allowed to move funds more easily in the interbank bond market, as part of China’s latest efforts to push forward capital account opening and make the renminbi more attractive globally, according to monetary authorities.

A month after removing the annual investment quota restrictions for foreign investors under the Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII) regimes, regulators decided to allow foreign institutions to easily transfer funds across different accounts when investing in the interbank bond market.

Foreign institutions can access the domestic interbank bond trading through multiple channels, including QFII, RQFII, direct investment and the bond connect programs. Any fund transaction across the different channels should be via the bond trading procedures as before.

The new policy, released by the People’s Bank of China and the State Administration of Foreign Exchange on Tuesday, said the same foreign institution, which invests in the interbank bond market directly or under the QFII or RQFII regimes, can directly transfer funds. And they only need to register once, said the statement.

The reform measures will further encourage foreign institutional investors to invest in the Chinese bond market, promoting the financial opening-up, and push forward the internationalization of renminbi, it said.

In the future, the PBOC and the SAFE will continually study and launch new measures to optimize management and achieve highquality opening-up in the financial market.

More than 90 percent of all bond issuance and trading activities in China’s $13 trillion bond market, the world’s second largest, came from the interbank market, and about 2 trillion yuan ($281.8 billion) of bonds were held by foreign investors by the end of June, according to the central bank data.

China Foreign Exchange Trade System showed that, by the end of June, 1,961 foreign institutional investors have invested in the interbank bond market, which was introduced by the PBOC in 1997 and is the largest fixed-income market in China.

Pan Gongsheng, PBOC vice-governor and the director of the State Administration of Foreign Exchange, said earlier that “the People’s Bank of China is carrying out a considerable reform on the unification of regulatory requirements for the opened (cross-border) investment channels.”

Different “channels” are existing at the same time, but in isolation from each other, and the regulatory rules are various in terms of market access and foreign exchange management. Because of that, foreign investors did not find it convenient to launch multichannel investments, the senior central bank official said.

Multiple investment channels, including the Shanghai-Hong Kong Stock Connect and the ShenzhenHong Kong Stock Connect, as well as a bond-connect program launched in Hong Kong, were designed to promote cross-border portfolio investments and foster the global usage of the yuan through opening of capital accounts.

Some new policies issued by China’s financial regulators, such as the market opening-up for foreign bankers and insurance companies, “demonstrated the government’s policy intention to further open up the country’s financial markets to foreign investors”, said Yulia Wan, senior analyst of the financial institutions group at Moody’s Investors Service.

The rules will broaden the scope of business for foreign institutions in the coming years, especially the ones that see China as a strategically important market, he said.