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New Regulations on the Investment in the Interbank Bond Market by Foreign Institutional Investors

The State Administration of Foreign Exchange (“SAFE”) issued a Notice on Foreign Exchange Administration Issues concerning Investment in the Interbank Bond Market by Foreign Institutional Investors (the “Notice”) on May 27, 2016, which further clarifies the supervision and administration of the investment in the interbank bond market by foreign institutional investors.

Since 2010, the People’s Bank of China (“PBOC”) and SAFE have promulgated several regulations on the investment in the interbank bond market by foreign institutional investors, including Notice of the People’s Bank of China on Issues Concerning the Pilot Program on Investment in the Interbank Bond Market with RMB Funds by Three Types of Institution Including Overseas RMB Clearing Banks (Yinfa [2010] No. 217), Announcement on Matters concerning Permitting the Access of Foreign Central Banks and Similar Institutions to China’s Inter-Bank Foreign Exchange Market (PBOC Announcement [2015] No. 31 Announcement), Announcement on Relevant Matters concerning Further Improvement in the Investment in the Interbank Bond Market by Foreign Institutional Investors (PBOC Announcement [2016] No. 3 Announcement) and the Notice, which provide continuously opening up of the interbank bond market to foreign central banks and further to other foreign financial institutions.

Among the regulations mentioned above, PBOC Announcement [2016] No. 3 Announcement (the “No. 3 Announcement”) provides the most practical rules for foreign institutional investors to engage in interbank bond market. This Announcement was effective on February 17, 2016, which includes 21 provisions with respect to scope and qualifications of the foreign institutional investors; qualifications, services and duties of the local settlement agents; and exit procedures.

To further improve the supervision and administration in this regard, the Notice provides that the foreign institutional investors are required to register with SAFE’s capital account information system through their settlement agents. According to the No. 3 Announcement, the relevant foreign institutional investors hereof refer to commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions, as well as other various types of financial institutions that meet relevant requirements and are registered and established outside the territory of the People’s Republic of China, pension funds, charitable funds, donation funds and other mid-to-long-term institutional investors recognized by PBOC.

In addition, the Notice requires that the currency used in inward and outward remittances should remain consistent in principle. To be more specific, per one certain foreign institutional investor, the ratio of foreign exchange to RMB in outward remittances (the “outward currency ratio”) is required to basically stay the same as the ratio of foreign exchange to RMB in inward remittances (the “inward currency ratio”), and the variation rate between the outward currency ratio and the inward currency ratio should be no more than 10%.

Apart from the aforementioned requirements, the Notice further stipulates that no maximum foreign exchange limitation would be imposed on the foreign institutional investors. That said, the foreign institutional investors may directly instruct their local banks to conduct business with respect to inward and outward remittances, and exchange settlement and purchase after their registrations with SAFE. No separate approval or consent from SAFE is required.

Also on May 27, 2016, the PBOC Shanghai Headquarter published the Detailed Rules for the Implementation of Recordation Administration of Investment in the Interbank Bond Market by Foreign Institutional Investors to facilitate the implementation of the No.3 Announcement. These detailed rules provides more qualification requirements on the settlement agents who are authorized to act on behalf of the foreign institutional investors in the interbank bond market.

China is on its way to set up a preliminary regime to supervise and manage the investment from foreign institutions in the domestic interbank bond market. Even though the scope of qualified investors is still limited to financial institutions currently, the thresholds to interbank bond market are likely to be simplified and lowered in the future in order to attract more foreign capitals and facilitate domestic financing.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume VI, Number 155

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About this Author

Xiaolu Xu, Corporate Attorney, Sheppard Mullin law firm
Associate

Ms. Xu is an associate in the Corporate Practice Group in the firm's Beijing office. Ms. Xu advises public and private companies in a variety of corporate matters. Her principle areas of practice are foreign direct investment, cross-border transactions, and general business matters.

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