CAPITAL MARKET DEVELOPMENTS IN CHINA

by Ricco Zhang, Mushtaq

Kapasi and Yanqing Jia

Capital market regulatory developments in China Two market guides by ICMA and NAFMII

On 24 September 2021, ICMA and NAFMII launched two publications intended to encourage understanding and participation by international institutions in China’s interbank bond market. Investing in China’s Interbank Bond Market: A Handbook and Panda Bonds: Raising Finance in China’s Bond Market (Case Studies) provide guidance for international investors and issuers on investing and on raising finance in China’s interbank bond market.

Southbound Bond Connect

On 24 September, southbound trading under the Bond Connect initiative was officially launched. Under Southbound Bond Connect, mainland investors that meet PBOC’s requirements may invest in bonds issued overseas and traded in the Hong Kong bond market. Counterparties are tentatively limited to market makers designated by the HKMA. The annual aggregate quota for Southbound Bond Connect is currently set at RMB500 billion or the equivalent, and the daily quota is currently RMB20 billion or the equivalent.

Wealth Management Connect

On 10 September, the Cross-boundary Wealth Management Connect (WMC) Pilot Scheme in the Guangdong-Hong KongMacao Greater Bay Area was launched. Individual investors in the three regions will be able to make use of the streamlined channel provided by the Cross-boundary WMC to invest in more diversified wealth management products across the border.

Cryptocurrency

On 24 September, various authorities in China issued a notice (only in Chinese) to deem activities related to cryptocurrency as illegal. Financial institutions must not provide services for cryptocurrency related activities, including account opening, fund transfer and settlement for cryptocurrencies.

Corporate credit bond market

On 18 August 2021, PBOC, NDRC, MOF, CBIRC, CSRC and SAFE jointly issued high-level Guiding Opinions on Advancing the Reform, Opening-Up and High-Quality Development of the Corporate Credit Bond Market, setting out a general policy to unify the different rules for various types of credit bonds, promote clearer understanding of the different credit risks of governments and government-related entities, and continue promoting the internationalisation of the interbank and exchange-traded bond markets.

Credit rating reform

On 6 August 2021, PBOC, NDRC, MOF, CBIRC and CSRC published a notice (only in Chinese) setting out requirements for credit rating agencies to strengthen their rating methodologies and systems, improve corporate governance and internal control mechanisms, and strengthen information disclosure. PBOC subsequently announced on 11 August that it has decided to pilot the repeal of requirements on credit rating for debt financing instruments issued by non-financial enterprises in the interbank market.

RMB internationalisation

PBOC published its 2021 report on RMB internationalisation (only in Chinese).

Competition in bond underwriting

On 11 August 2021, NAFMII issued a notice (only in Chinese) requiring lead underwriters to report quarterly and annually on their quotations for bond underwriting services.

Bond lending businesses

On 9 July 2021, PBOC published (only in Chinese) a consultation draft of the Administrative Measures for Bond Lending in the Interbank Bond Market.

Contact: Yanqing Jia yanqing.jia@icmagroup.org

Opening up China’s bond market

by Dr. Xu Zhong

In recent years, China has implemented policies to open up its financial industry, with positive results. The limits on foreign ownership in Chinese banks, securities companies, fund management firms, futures companies and other institutions have been removed; Chinese bonds and stocks have gradually been included in international flagship indexes; Bond Connect’s south-bound investment channel was officially launched on 24 September 2021. As of the end of June this year, overseas investors held more than 10 trillion yuan (USD1.2 trillion) in domestic RMB financial assets (including equities, bond, loans and deposits), of which the net increase in holdings in the first half of this year was 1.27 trillion yuan (USD200 billion). NAFMII, as a self-regulatory organization in China’s institutional investor market, has actively promoted the opening-up of the bond market under the guidance of the People’s Bank of China. NAFMII has supported 47 overseas institutions to issue panda bonds with a total value of more than 320 billion yuan, and formulated panda bond rules that are in line with international standards, introduced international banks to underwrite debt financing instruments in China, and promoted the participation of international rating agencies in the inter-bank bond market. NAFMII also has continuously improved the self-discipline in the bond market, launched innovative green financing products such as carbon neutral bonds and sustainability-linked bonds, brought domestic green bond standards more in line with international standards, maintained order in the secondary market, strengthened the resolution mechanism of corporate bond defaults, and strengthened investor protection mechanisms. In general, the channels available for overseas institutions to participate in China’s financial market have become smoother and the regulatory environment has become more friendly. To encourage understanding and participation by international institutions in China’s interbank bond market, NAFMII and ICMA jointly released two market guides, Investing in China’s Interbank Bond Market: A Handbook and Panda Bonds: Raising Finance in China’s Bond Market (Case Studies), on 24 September, providing guidance for international investors and issuers. The opening-up of China’s financial market has further broadened and deepened institutional participation. First, as the “water fresh from the source” of China’s financial system, overseas institutions play a role in diversifying investment and financing preferences, driving financial innovation, improving market liquidity and enriching asset allocation of China’s investors.

Second, the entry of overseas intermediaries will promote high-level competition and improvement of China’s financial system. The entry of overseas intermediaries will encourage China’s financial intermediaries to continuously improve their professional capabilities, service quality and compliance awareness, and management of reputational risk. In addition, overseas institutions will also bring some mature and effective international mechanisms and best practice into China to improve market efficiency. In the process of financial opening-up, overseas institutions will also bring high professional standards to China’s financial system, such as transparency of information disclosure, market-based pricing of financial products, credibility of credit ratings, connectivity of financial infrastructure, completeness and the robustness of the legal system. This presents an opportunity for anticipated deepening reform of China’s financial system as well as adjustments to the existing market structure and the institutional rules of China’s financial industry. Third, high-level opening-up of the financial markets will serve the development and high-level opening-up of the broader economy, attracting more international ESG investors and GSS bond issuers to participate in China’s financial market, introducing sustainable investing and financing concepts, and supporting the economy’s transition to green, social responsibility and sustainable development.

From the international viewpoint, currently the major developed economies are still implementing quantitative easing, with a zero or even negative interest rate policy. At the same time, China as the world’s second largest economy adheres to the road of high-quality development, and its economy has achieved continuous and stable growth. The green transformation is being accelerated, and normal monetary policy has been implemented. Opening up enables international institutions to better share the fruits of China’s stable and high-quality development. Recently, the Financial Commission of the State Council proposed to “continue to expand high-level financial opening-up”, and the People’s Bank of China and five other ministries issued a joint statement, explicitly proposing to “promote high-level opening-up of the bond market”. At the same time, China formally proposed to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Bond Connect southbound segment has also been officially launched. NAFMII will further improve the relevant institutional mechanisms and in particular facilitate overseas institutions’ participation in China’s financial market. We should enrich financial risk hedging tools, promote international convergence of accounting and auditing standards, increase flexibility in the use of proceeds, and provide a more friendly foreign exchange management system and tax regime. In promoting further opening-up policies, NAFMII will continue to make our best efforts to serve the market.

Dr. Xu Zhong is Vice President, Deputy Secretary-General, National Association of Financial Market Institutional Investors (NAFMII)