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

CIBM Direct creates a route for international investors to access Chinese onshore bonds, complementing long-established QFII and RQFII schemes which have been now merged into the QFI scheme recently.

CIBM Direct creates a route for international investors to access Chinese onshore bonds, complementing long-established QFII and RQFII schemes which have been now merged into the QFI scheme recently.

What is the China Interbank Bond Market (CIBM Direct) regulation?

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 institutional investors to access onshore bonds, complementing long-established QFII and RQFII schemes, which have been merged into the QFI scheme recently.

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

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

Scope of the CIBM Direct regulation

Under the CIBM Direct framework, international institutional investors are able to access cash bonds (both rates and credit bonds), bond repo and other derivatives.

The CIBM Direct 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).

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 or currency scale control is imposed on funds to allow the bond settlement agent to monitor the RMB/FCY ratio as required by the Chinese regulator:

  • Ratio control: The ratio of RMB to FCY (currency ratio) shall generally match the original currency ratio when the investment principal was remitted into China, with a maximum permissible deviation of 10%. Such ratio requirement can be waived for the first repatriation, provided that the FCY or RMB capital amount to be repatriated may not exceed 110% of the FCY or RMB amount remitted into China in aggregate.
  • Scale control: investors are allowed to repatriate up to 110% of accumulated FCY injected and 110% of accumulated RMB injected. Calculation formula is RMB outflow total amount/CNY inflow total amount ≤ 110%; FCY outflow total amount/FCY inflow total amount ≤ 110%

There is no lock-up period.

Industry implications of the CIBM Direct regulation

Before trading, offshore investors (including those with a QFI 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 to PBoC.

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 the QFI scheme and significantly facilitates access to the Chinese fixed income market for foreign institutional investors:

  • No investment quotas under this scheme.
  • The setup process is easier: a simple registration to PBoC is required with account opened with local market infrastructure before trading.

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

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 Bond Settlement Agent 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 Bond Settlement Agent 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 cycle

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 until 2021

August 2019 – The settlement cycle can be T+3 for offshore investors, in addition to the existing T+0, T+1 and T+2 cycle

January 2020 – Direct CIBM investors are offered with more channels to hedge their FX risk onshore

March 2020 – Non-standard settlement cycle T+N (N≥4) and recycling settlement is available to offshore investors for the cash bond settlement

September 2020 – Trading hours extended to 20:00 pm China time for trades with settlement cycle T+1 and above

March 2021 – Foreign investors are allowed to trade FX spot with onshore 3rd party agent

June 2021 – Simplification on the PBoC registration process for asset managers

October 2021 – Continue to exempt taxes on the bond interest for the foreign investors until end of 2025

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