In this article, we provide an overview of the four programs that foreign investors can use to invest in the Chinese fixed income markets.
An introduction to China's fixed income markets is provided here.
The four programs are:
China Interbank Bond Market (CIBM) Direct
Bond Connect Program
Qualified Foreign Institutional Investor (QFII) program
Renminbi Qualified Foreign Institutional Investor (RQFII) program
Currently, only foreign institutional investors (not retail investors) can invest directly in Chinese fixed income products, although we discuss alternatives for retail investors below.
Please refer here for How to Invest in Chinese Equities, which includes information for both institutional and individual investors.
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China Interbank Bond Market (CIBM) Direct Program
The China Interbank Bond Market (CIBM) was established in 1997 by the People's Bank of China (PBOC) to facilitate the trading of Chinese Treasury bonds (T-bonds) among Chinese institutional investors. Previously, Treasury bonds were traded on exchanges, but following the "327 Incident" which involved massive speculation on Chinese T-bonds trading on the Shanghai Stock Exchange, the Chinese regulators removed T-bonds from these stock exchanges to shield them from the impact of undue volatility and speculation from retail investors. Only institutional investors could participate in the CIBM, where the majority of the debt instruments in the CIBM are government bonds and bills (the latter has a shorter maturity), as well as a small number of corporate bonds.
In 2010, the PBOC piloted a program to allow foreign institutions to invest in the CIBM, including foreign central banks, RMB clearing banks in Hong Kong and Macau, and foreign financial institutions engaging in RMB cross-border trade settlement. In 2015, the program was extended to include international financial organizations and sovereign wealth funds, then in 2016 the program was expanded even further to include foreign commercial banks, insurance companies, securities companies, and asset managers.
To participate in the CIBM, foreign institutional investors must register with the PBOC via the support of a licensed settlement agent. The scope of investment includes bonds, bond forwards, repurchase agreements, interest rate swaps and forward rate agreements, with slightly different rules for different types of institutional investors (i.e. whether they can invest freely or invest solely for the purposes of hedging). Since 2016, quota approval is no longer required at the individual investor level.
Bond Connect Program
Bond Connect was established in 2017 as a way for off-shore investors to invest in mainland Chinese fixed income products. Similarly to the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, this is done through trading infrastructure based in Hong Kong. Bond Connect gives investors access to some, but not all, of the products available on CIBM.
Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) Programs
The QFII and RQFII programs were initially founded as programs for foreign institutional investors to invest in the Chinese stock markets (more details here). However, as China continued to open up its markets, the two programs were later expanded to include a wider scope of product offerings, including exchange-traded and CIBM-traded bonds.
Which One Should I Pick?
Bond Connect is the simplest to apply for with a streamlined account opening process, followed by CIBM, and then QFII and RQFII. CIBM has the widest selection of fixed income instruments and counterparties, as well as related derivatives, which may not necessarily be available on Bond Connect or QFII/RQFII. There are specific regulatory differences between the four platforms that institutional investors need to take into account, including qualification standards, differences in how the investment process is carried out, tax differences, and etc.
China's Macroeconomy and Policy Developments
The Governor of the People's Bank of China has recently published an article concerning the direction of China's future financial policies, including the intention to pursue traditional monetary policy without the use of quantitative easing or negative interest rates, as well as the aim to maintain a stable value for the yuan. The plan to allow market forces to play a bigger role as part of further reforms in the financial markets was also mentioned, in addition to the government decision to expand the opening up of China's markets to foreign investors. Further information can be found here.
Our view is that this article is good news to those interested in investing in China. Maintaining normal monetary policy with a stable foreign exchange rate for the Renminbi boosts the attractiveness of yuan-denominated assets, while also shielding investors from exchange rate risk to some extent. The capital market reforms are predicted to attract more high-quality Chinese companies that would have otherwise sought out funding abroad, and the opening up of domestic markets will allow foreign investors to access a more diversified range of investment opportunities in China.
Investing in Chinese Bonds as a Retail Investor
Even though direct investing in the Chinese fixed income markets is currently limited to institutional investors, individual investors can consider ETF alternatives:
More on Investing in China (Equities):
Glossary of All China-Related Terminology:
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