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China Interbank Bond Market (CIBM Direct) regulation - regulation memo
China Interbank Bond Market (CIBM Direct) regulation - regulation memo
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China Interbank Bond Market (CIBM Direct) regulation - regulation memo

24/04/2019

CIBM Direct creates a route for international investors to access Chinese onshore bonds, complementing long-established QFII and RQFII schemes.

China Interbank Bond Market (CIBM Direct) regulation: what is it?

The Chinese bond market is the third largest in the world (USD 11.17 trillion in Q4 2018, source BIS/BNP Paribas). Announced in February 2016, the liberalisation of the domestic bond market through the CIBM Direct scheme was a further step in opening up Chinese financial markets to international investors and encouraging them to invest in Renminbi.

The CIBM Direct scheme created a route for international investors to access onshore bonds, complementing long-established QFII and RQFII schemes.

Under the CIBM Direct scheme, foreign institutions can trade bonds directly through banks holding a Type A licence in Mainland China (with only six foreign banks including BNP Paribas).

The CIBM market can also be accessed via Bond Connect through Hong Kong.

CIBM scope

Under the CIBM framework, international investors are able to access cash bonds (both rates and credit bonds).

The CIBM scheme applies to a large range of investors: commercial banks, asset managers, insurers, securities houses, pension funds, charitable funds and other long-term investors approved by People’s Bank of China (PBoC).

It defines three categories of investors:

  • Type A investors (such as BNP Paribas) can trade, settle and provide custody for interbank bond market instruments both for themselves and on behalf of Type C investors.
  • Type B investors can trade and settle in the interbank bond market for themselves, and trade directly with others.
  • Type C investors must appoint a Type A investor for settlement to carry out bond trading on their behalf. As of December 2018, all foreign investors are Type C.

Further clarification on the CIBM Direct model

  • There is no restriction on the currency of the investment principal remitted from offshore.
  • Onshore FX conversion and hedging of FX risk for the CIBM investments are permitted without any pre-approval from SAFE. The FX derivatives available onshore include: FX Forward, Swap, CCS and vanilla options.
  • Onshore Bond and IR derivatives are permitted for hedging purpose, including Bond Lending, Bond Forward, IRS and FRA.
  • Master Agreement is needed for entering derivatives onshore:
    • ISDA or NAFMII for FX products;
    • NAFMII for IR and Bond derivatives.
  • Currency ratio control is imposed on funds repatriation to offshore:
  1. Where an investor repatriates the funds out of China, the ratio of RMB to FCY shall generally match the original currency ratio when the investment principal was remitted into China, with a maximum permissible deviation of 10%
  2. For the initial repatriation, the aforesaid Currency Ration requirement can be waived, provided that the FCY or RMB to be repatriated does not exceed 110% of the FCY or RMB remitted into China in aggregate
  3. In case an investor enters the CIBM with one single currency, the first repatriation amount cannot exceed 110%. However, there is no limit starting from the second repatriation
  • There is no lock-up period.

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Industry implications of CIBM Direct

Before trading, offshore investors (including those with a QFII or RQFII licence) must appoint an onshore settlement agent. The settlement agent submits the two-page filing form, which contains basic information and the settlement agent agreement signed by the onshore settlement agent and its client.

PBoC will acknowledge the filing within 20 calendar days (usually 10 calendar days). The settlement agent manages the account opening on behalf of its clients – on a segregated basis – with the China Foreign Exchange Trade System (CFETS), China Central Depository & Clearing (CCDC) and the Shanghai Clearing House (SHCH). The settlement agent manages the offshore investor’s daily transactions and mandatory reporting to regulators (if required).

The CIBM Direct scheme complements long-established QFII and RQFII schemes and significantly facilitates access to the Chinese fixed income market for foreign institutional investors:

  • Investment quotas are removed under this scheme.
  • The process is easier: a simple registration to PBoC is required before trading.

BNP Paribas (China) Ltd. was granted a Type A licence by PBoC in March 2015 and can provide settlement agent and custodial services for foreign investors (Type C) who have an interest in the China Interbank Bond Market.

BNP Paribas Securities Services' view

We welcome this major step in the continuing liberalisation of China’s financial markets. It enables international investors to diversify their fixed income portfolios, and gain access to this rapidly growing and increasingly important market. In addition, as international credit rating agencies are allowed to establish a presence in China since July 2017, foreign investors may be more secure in gauging Chinese corporate debt, which may be complex.

Foreign institutional investors are able to rely on a single Type A partner – such as BNP Paribas (China) Ltd. – to access the onshore fixed income market. In this role, BNP Paribas (China) Ltd. fully manages the administrative process required to gain access to the scheme and ensure a seamless process from trade execution to settlement and custody.

Key dates

March 2015 - BNP Paribas (China) Ltd. granted Type A licence by People’s Bank of China (PBoC)

February 2016 - PBoC announcement of the new scheme to invest on CIBM

Q1 2017 - Offshore investors can hedge their forex exposure linked to their bond positions

June 2017 - The settlement cycle can be T+2 for offshore investors, in addition to the existing T+0 and T+1 cycles

June 2018 - Direct CIBM investors can hedge RMB fx risk offshore, enjoying onshore RMB exchange rate through offshore RMB participating Banks.

November 2018  - Three-year income tax and VAT exemption on bonds interest granted to all foreign investors

 

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