China to relax rules for foreign investors in onshore bond market

23 Sep, 2020 20:23
source: Singularity Financial

Singularity Financial Hong Kong September 23, 2020 – China says it will let foreign bond investors transfer money into and out of the country more freely, allowing them easier access to the onshore bond market.

According to a draft regulation published by the People’s Bank of China and the State Administration of Foreign Exchange (SAFE) on Monday, foreign institutional investors such as central banks, investment banks, wealth-management firms and insurance companies will be allowed to repatriate a larger amount of funds into the currency of their original investment without restrictions.

The draft will be open for public feedback until October 20 and rule changes are expected to come into effect soon afterwards.

The relaxation addresses one of the biggest problems that foreign firms now face in attempting to invest in China’s onshore financial markets: it is relatively easy to bring money in, but it is hard to get money out.

By granting foreign institutions greater autonomy in handling bond investment flows, China is easing its strict controls over capital outflows, letting foreign investors access onshore bonds directly, along with existing indirect schemes such as the Bond Connect via Hong Kong or passive flows via international investment indices that include China bonds.

Under the new rules, a foreign investor will be able to open a bond investment account at a custodian bank in China, and this will allow firms to bring in money directly to buy domestic bonds. If the firm brings in US dollars, it will be able to repatriate funds in US dollars; and if it brings in yuan, it can repatriate yuan out of the country.

The only restriction is that it cannot bring in one currency and repatriate profits in another, thereby avoiding foreign exchange arbitrage. For investments in both yuan and foreign currencies, the amount of foreign currency being repatriated will be capped at 1.2 times its original investment in that currency, an upwards adjustment from 1.1 times previously.

Once they bring money into China, foreign investors will also be allowed to invest in foreign exchange derivative products, either by trading directly with Chinese counterparts or via the China Foreign Exchange Trading System, according to the draft rules.

Foreign institutions that have already opened Qualified Foreign Institutional Investor (QFII) investment accounts will be allowed to transfer money into new bond investment accounts, according to the draft regulation.

China’s central bank and foreign exchange regulator said in a statement that the new rules are aimed at “facilitating foreign investment in China’s bond market” via “direct market access through onshore accounts” for foreign investors.

Beijing’s new move will appeal to global bond investors searching for higher yields, given the near-zero or negative interest rates available in developed economies after major central banks flooded their banking systems with liquidity to help offset the economic damage caused by the coronavirus pandemic.