Name: Circular regarding the pilot scheme for investment in the interbank bond market by offshore Renminbi clearing banks and other eligible offshore institutions in Renminbi (《关于境外人民币清算行等三类机构运用人民币投资银行间债券市场试点有关事宜的通知》, the “Circular”)
Issuing authority: People’s Bank of China (the “PBOC”)
Effective date: 16 August 2010
Subject: Interbank bond market/RMB cross-border settlement
The PBOC has promulgated the Circular to allow offshore RMB clearing banks and other eligible offshore institutions to invest in the onshore interbank bond market (the “interbank bond market”) in Renminbi. The Circular is a further step in the gradual opening of capital account items in China and the internationalisation of Renminbi.
Highlights
- Until now, only onshore financial institutions and enterprises may participate in the interbank bond market. The Circular has expanded the type of eligible participants to include the following offshore institutions (“Eligible Offshore Institutions”):
- Offshore central banks and monetary authorities (“Offshore Central Banks”);
- RMB clearing banks in Hong Kong and Macau (“Offshore RMB Clearing Banks”);
- Offshore participant banks of the pilot scheme for RMB cross-border trade settlements (“RMB Participant Banks”); and
- other offshore financial institutions participating in the pilot scheme for RMB cross-border trade settlements.
- The source of RMB funding for this purpose is limited to offshore RMB obtained by Eligible Offshore Institutions pursuant to monetary cooperation arrangements between the PBOC and foreign central banks (such as the currency swap agreements entered into between PBOC and other foreign central banks), cross-border trade settlement services and other RMB investment business undertaken by such Eligible Offshore Institutions.
- An Eligible Offshore Institution is required to apply for a quota from the PBOC to invest in the interbank bond market.
- An Offshore Central Bank or Offshore RMB Clearing Bank may conduct trades in the interbank bond market directly or through an onshore settlement agent, whereas an Offshore Participating Bank must appoint an onshore settlement agent to conduct such trades and handle the settlement.
- Each Eligible Offshore Institution will only be allowed to open onshore RMB special purpose accounts for settlement of trades in the interbank bond market.
- All Eligible Offshore Institutions are prohibited from executing any trades with parent entities, any subsidiaries/branches of their parent companies and other affiliates in the interbank bond market.
The pilot scheme represents a small yet significant step in the opening of capital account items by the PRC Government and a methodical step towards internationalisation of the RMB. For the first time, foreign central banks and other eligible financial institutions will be allowed to participate in the interbank bond market (which is estimated to be one of the largest in the world, with issuance in the first half of 2010 reported to be almost equivalent to USD100 billion) in RMB. Until now, all foreign investment into China has been made in foreign currency (which must then be converted into RMB for use onshore in China). The extension of this important investment channel to foreign central banks and other eligible financial institutions will hopefully encourage them to hold RMB outside China, thereby enhancing the size and depth of the offshore RMB market in preparation for the RMB to ultimately becoming a hard currency. The quota system, however, means that the PRC Government will continue to control the RMB inflow. In addition, it remains to be tested whether other non-RMB partipant banks such as broker-dealers, insurance companies and funds will be able to participant in these arrangements directly or indirectly e.g. whether there will be any limitation on the ability of the eligible institutions to utilise their approved quota to trade such bonds on behalf of other investors or further distribute the bonds synthetically offshore. The new development is exciting, but is only the first step in the internationalisation of the RMB.
Contacts
If you would like to discuss anything regarding this Alert please contact:
Chong Liew
Partner
+852 2842 4857
William Liu
Partner
+8621 2891 1838
Fang Jian
Partner
+8621 2891 1858
