Up until mid-February 2016, foreign institutional investors accessing China onshore bonds through the China Interbank Bond Market (CIBM) would do so via the RQFII/ QFII regime, which is subject to specific restrictions and compliance requirements specifically on investment quota and repatriation. Access to CIBM was otherwise limited to foreign central banks or monetary authorities, RMB settlement banks and settlement participating banks.
On 24 February 2016, Announcement No. 3 issued by the People’s Bank of China (PBoC) liberalized the CIBM, allowing foreign institutional investors, including commercial banks, insurance companies, fund management companies/asset management institutions, investment products and funds, to directly access the CIBM and trade in onshore RMB bonds upon successful application to their settlement agents.
Subsequently on 27 May 2016 both PBoC and SAFE issued implementing rules setting out the details to put Announcement No.3 into effect. Settlement Agents are delegated with the responsibility to determine the eligibility of foreign institutional investors, which should be ‘medium and long term’ investors.
Both corporate entities and fund/ managed accounts can apply for access. In applying, potential investors will need to fill out information regarding investment period and investment quota, and would also need to indicate whether they are existing RQFII or QFII holders. Existing RQFII or QFII holders will still be subject to the relevant restrictions on capital repatriation and investment quota, whereas a first time CIMB investor will be subject to the specific Announcement No.3 requirements and compliance with a currency ratio on repatriation. It is recommended that investors should enter the CIBM in one capacity only, ie. either through RQFII/QFII or directly under Announcement No.3.
For Hong Kong retail funds authorized by the Securities and Futures Commission (SFC), on 11 July 2016, the SFC issued a FAQ No. 20 under its “Frequently Asked Questions on Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds” (SFC’s FAQ) regarding disclosure and approval requirements for participation in the CIBM. Fund issuers should note the following points reflecting SFC’s disclosure requirements before making such investments.
If a fund shall make a substantial investment in RMB denominated debt/ money market instruments (RMB Bonds) (i.e. 30% or more of the fund’s NAV):
- When the existing investment objectives and strategy do not cover substantial investment in the RMB Bonds, e.g. a US bond fund, prior SFC approval will need to be sought to amend the investment objectives to include RMB Bonds and at least 1 month’s prior notice to investors are required before such investments can be made.
- When the existing disclosures allow investments in RMB Bonds to be made (whether via CIBM or RQFII/QFII regime), generally no further prior approval from SFC is required for accessing the CIBM directly if the fund issuer considers such changes as immaterial (as per definition under SFC’s FAQ). The fund issuer will still need to notify the shareholders of this change as soon as reasonably practicable.
- The offering documents (including the product key facts statement for Hong Kong investors) should be updated to include further details, e.g. the intended proportion of investments via direct access under Announcement No.3, and additional key risks. While direct access under Announcement No.3 is not subject to quota risks, fund issuers should consider whether other applicable key risks are already set out in the offering documents, e.g. China investment risks including capital control, custody risk. Issuers should also consider inclusion of other specific risks such as uncertainty or lack of clarity on the withholding tax arrangement for investment via CIBM.
- In particular, fund issuers should ensure that proper Mainland custodian arrangements are in place regarding safe custody and segregation of assets for the investment under CIBM, and if the fund is one that primarily invests in the Mainland market (ie. investing more than 70% for Hong Kong funds or more than two-thirds for UCITS funds), the offering documents should include an extract of a Mainland legal opinion (or a confirmation, as applicable) relating to such.
- The updated offering documents should be filed with SFC as soon as practicable.
If a fund shall make an ancillary investment in RMB Bonds (i.e. more than 10% but less than 30% of the fund’s NAV):
- Generally no SFC prior approval is required but fund issuers should ensure that the offering documents should be updated to include further details and risks as outlined above. The updated offering documents should be filed with SFC as soon as practicable and will be subject to post vesting by the SFC.
- The fund issuer should notify the shareholders of this change as soon as reasonably practicable.
If a fund shall make minimal investment in RMB Bonds (ie. less than 10% of the fund’s NAV)
- No SFC prior approval required. Fund issuers should exercise discretion/ judgement and consider if any updates are necessary.
This update is provided for general information only and is not intended as legal advice in any specific case. Please contact Vivien Teu (vivien.teu@vteu.co) or Christina Suen (christina.suen@vteu.co) for any enquiry or assistance on the subject matter.
