Di Wu and Teresa Huang
The People’s Bank of China, the China Securities Regulatory Commission (hereinafter referred to as the “CSRC”) and the State Administration of Foreign Exchange jointly issued the Announcement  No. 4 (hereinafter referred to as the “Announcement”), which makes relevant provisions for further facilitating investment in the Chinese bond market by foreign institutional investors in compliance with laws and regulations, and became effective on June 30, 2022. The Announcement mainly includes the definition of foreign institutional investors, qualification requirements, investment content and regulatory requirements, as described below.
I. Definition of Foreign Institutional Investors
According to the Announcement, the term “foreign institutional investors” refers to foreign central banks or monetary authorities, international financial organizations and sovereign wealth funds (hereinafter collectively referred to as “sovereign institutions”) as well as commercial banks, insurance companies, securities companies, fund management companies, futures companies, trust companies and other asset management institutions, and other financial institutions, as well as pension funds, charitable funds, endowment funds and other medium and long-term institutional investors legally registered and formed outside the People’s Republic of China (hereinafter collectively referred to as “commercial institutions”). Thus, it can be seen that the Announcement mainly divides foreign institutional investors into two categories: sovereign institutional investors and commercial institutional investors, for which different regulatory requirements also apply, and investing entities should pay attention to the distinction therebetween.
II. Qualification Requirements for Commercial Institutions
According to the Announcement, a commercial institution investing in the Chinese bond market shall meet the following conditions:
(1) It is formed in accordance with the relevant laws of the country or region where it is located;
(2) It has a sound governance structure and a perfect internal control system, satisfies the regulatory requirements, and has not received any major punishment from the regulatory organ for any violation of laws or regulations in the bond investment business in the previous three years;
(3) Its source of funds is legal and compliant;
(4) It has the corresponding risk identification and assumption ability, and is aware of and assumes the risks of bond investment on its own;
(5) Other conditions prescribed by the People’s Bank of China and the CSRC.
III. Investment Content
In terms of permissible transactions, according to the Announcement, foreign institutional investors may conduct spot bonds, bond lending, related derivative products for the purpose of risk management, open-end bond index securities investment funds and other transactions recognized by the People’s Bank of China and the CSRC in the Chinese bond market.
In terms of trading methods, foreign institutional investors investing in the inter-bank bond market may open bond accounts with bond depository and clearing institutions recognized by the People’s Bank of China, or entrust bond custody to qualified domestic custodian banks directly or through their overseas custodian banks. Meanwhile, a foreign institutional investor conducting bond trading shall enter into a written contract. The contract shall make specific provisions on such elements as trade date, trade direction, bond variety, bond quantity, trading price or interest rate, account and settlement method, delivery amount and delivery time, etc. Its written form includes the deal ticket generated by the electronic trading platform system recognized by the People’s Bank of China and the CSRC, telegram, telex, fax, contract letter, letter, etc.
If a foreign investment institution also has a QFII account, the same foreign institutional investor may, according to its own investment management needs, conduct the two-way transfer between the bonds under the QFII account and the bonds invested in accordance with the Announcement in a manner recognized by the market regulator such as non-trade transfer, and may carry out the two-way transfer of funds between the QFII custody account and the fund account opened in accordance with the Announcement and relevant regulations within China.
IV. Regulatory Requirements
According to the Announcement, foreign institutional investors conducting investment business in the Chinese bond market shall comply with Chinese laws and regulations, as well as the relevant provisions on the Chinese bond market, cross-border RMB business and foreign exchange management. Moreover, foreign institutional investors shall comply with the relevant business regulations of trading, clearing and other financial infrastructure and financial institutions on account opening, trading, custody and clearing of foreign institutional investors. The financial infrastructure and financial institutions that provide trading, registration, custody and clearing services for foreign institutional investors are required to follow the relevant provisions of the Announcement and do their service and monitoring work in a timely manner according to their respective responsibilities.
In addition, the Announcement also provides for the regulatory obligations to be performed by various financial institutions and the domestic custodian banks of foreign institutional investors. Furthermore, the Announcement is applicable to institutional investors established in the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region as well.
Overall, the Announcement encourages foreign institutional investors to invest in the Chinese bond market as medium and long-term investors, without setting a particularly high entry threshold, and the procedures also follow the relevant business regulations of account opening, trading, custody and clearing for existing foreign institutional investors, so foreign institutional investors who are already familiar with the Chinese market should be able to enjoy a lot of convenience.