The lowdown: PBoC clarifies Bond Connect rules

Central banks, monetary authorities, sovereign wealth funds, international financial organisations, qualified foreign institutional investors (QFII) and RMB QFII (RQFII) will be able to use the bond link.

Offshore financial institutions, such as commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions, can also trade via Bond Connect.

The second group of financial institutions can distribute investment products to their clients. The rules list the likes of medium to long-term institutional investors recognised by the PBoC, such as pension funds, philanthropic funds and donation funds, as potential clients. 

China Foreign Exchange Trade System (CFETS), onshore custodians and CIBM settlement agents can register on behalf of offshore investors. These institutions can directly register for investors, or they can co-operate with offshore institutions to collect the relevant materials for registration.

The Hong Kong Monetary Authority’s Central Moneymarkets Unit (CMU) will be the offshore custodian. China Central Depository and Clearing (CCDC) and the Shanghai Clearing House will be the onshore custodians.

Foreign investors can buy bonds in both the primary and secondary markets. All cash bonds on the interbank bond market will be available.

In the future, Bond Connect will expand to cover transactions such as bond repurchasing (repo), bond lending, bond forwards, interest rate swap (IRS) and forward rate agreement (FRA).

Offshore trading platforms, including but not limited to Tradeweb and Bloomberg, will be welcome to provide Bond Connect trading services when they are ready, said PBoC. CFETS will be the onshore trading platform.

Bond Connect will apply the model commonly used in the international markets, with onshore dealers, which include market makers and volunteer market makers, trading with offshore investors.

Offshore investors can use RMB capital that they have accumulated, raised or exchanged in the offshore RMB market to invest via Bond Connect.

In its May 31 draft, PBoC noted that foreign investors using FX will be able to convert their capital into RMB, either via the Hong Kong RMB clearing bank or via overseas banks conducting offshore RMB business that are qualified to access the onshore interbank FX market.

The latest batch of rules specified that the Hong Kong RMB clearing bank is Bank of China (Hong Kong), appointed to the role in December 2003, and that the second category of Hong Kong RMB banks includes China Citic Bank International, China Construction Bank (Asia), Hang Sang Bank, HSBC, Industrial and Commercial Bank of China (Asia), and the Hong Kong branches of Agricultural Bank of China, Bank SinoPac, China Merchants Bank, Citi and Standard Chartered.

When the bonds mature or are sold, the RMB capital — which includes the principal and income from the bonds — can be used to invest in onshore bonds again. However, if the capital will not be used for that purpose, it must be exchanged into foreign currencies via the Hong Kong clearing banks.

In order to ensure that the investors’ funds will be used for the sole purpose of trading via Bond Connect, and to prevent currency arbitrage behaviour, regulators will require investors to open special RMB accounts at the Hong Kong clearing banks to deal with currency exchange and settlement issues.

Considering that northbound trading will launch soon — GlobalRMB understands the launch date will likely be July 3 — if the Hong Kong clearing banks cannot set up special RMB accounts for Bond Connect investors in time, investors will be allowed to use their own RMB accounts temporarily. But the banks will need to try to set up special RMB capital accounts for them as soon as possible.

For offshore investors who use their own RMB to invest, and do not need to exchange into foreign currencies, there is no need to go through the clearing banks.

The overall structure is expected to replicate that of the existing Stock Connect scheme. CMU in Hong Kong, the clearing system operated by the Hong Kong Monetary Authority, will act as nominee bondholder for foreign investors with the onshore infrastructure, just as the Hong Kong Securities Clearing Company (HKSCC) acts as nominee holder for the Stock Connect scheme.

PBoC said phase one of CIPS, which uses the real-time gross settlement ( RTGS ) method to deal with renminbi-denominated remittance, was established as the fast lane for cross-border RMB settlement.

The second phase of CIPS, which is yet to launch, will extend operating hours, provide more flexible ways to manage business and more convenient capital settlement services for cross-border bond transactions, said the central bank.