The central bank and the foreign exchange bureau issued the Regulations on the Management of Funds Invested by Overseas Institutional Investors in the China Bond Market.

CCTV News:According to official website, the central bank, in order to further expand the two-way opening of the financial market, recently, the People’s Bank of China and the State Administration of Foreign Exchange jointly issued the Regulations on the Management of Foreign Institutional Investors’ Investment in the China Bond Market (hereinafter referred to as the Regulations), which improved and clarified the requirements for the management of foreign institutional investors’ investment in the China bond market. The promulgation of the Regulations is conducive to further facilitating foreign institutional investors to invest in the China bond market and enhancing the attractiveness of the China bond market to foreign institutional investors.

The main contents of the Regulations include: First, unify and standardize the management rules of foreign institutional investors’ investment in the China bond market, such as fund accounts, fund receipt and payment, remittance and statistical monitoring. The second is to improve the management of spot settlement and sale of foreign exchange, allowing overseas institutional investors to handle it through third-party financial institutions other than settlement agents. Third, optimize foreign exchange risk management policies, further expand foreign exchange hedging channels for overseas institutional investors, and cancel the limit on the number of counterparties in counter transactions. Fourth, optimize the matching management of remittance and inflow currencies, enhance the convenience of remittance of investment funds by overseas institutional investors, and encourage long-term investment in the China bond market. The fifth is to clarify the foreign exchange management requirements of sovereign institutions. Sovereign institutional investors who invest through custodians or settlement agents (commercial banks) should register with banks.

The Regulations shall come into force as of January 1, 2023.

Provisions on the management of funds invested by overseas institutional investors in China bond market

Article 1 These Provisions are formulated in accordance with the Law of the People’s Republic of China on the People’s Bank of China, the Regulations of People’s Republic of China (PRC) on Foreign Exchange Control and other relevant laws and regulations in order to support and regulate foreign institutional investors to invest in the China bond market.

Article 2 The term "overseas institutional investors" as mentioned in these Provisions refers to overseas institutions that directly invest in the China bond market through multi-level custody and settlement agency in accordance with the Announcement of the State Administration of Foreign Exchange of China Securities Regulatory Commission of the People’s Bank of China ([2022] No.4).

Article 3 The China bond market mentioned in these Provisions includes the inter-bank bond market and the exchange bond market in China.

Article 4 Overseas institutional investors may independently choose the remittance currency to invest in the China bond market. Encourage overseas institutional investors to invest in the China bond market and use RMB for cross-border receipt and payment, and complete cross-border RMB fund settlement through the RMB cross-border payment system (CIPS).

Article 5 Domestic custodians (hereinafter referred to as custodians) and settlement agents of overseas institutional investors shall handle relevant matters on behalf of overseas institutional investors in accordance with the relevant requirements of these Provisions.

Article 6 The People’s Bank of China, the State Administration of Foreign Exchange and its branches shall, according to law, supervise, manage and inspect the accounts, fund receipts, payments and remittances involved in overseas institutional investors’ investment in China bond market.

Article 7 The State Administration of Foreign Exchange shall register and manage the funds invested by overseas institutional investors in the China bond market.

Overseas institutional investors shall, within 10 working days after obtaining the notice of China bond market investment filing issued by the relevant financial regulatory authorities or other documents with the same effect, designate a custodian or settlement agent to handle the registration on behalf of overseas institutional investors through the capital account information system of the State Administration of Foreign Exchange (hereinafter referred to as the capital account information system) on the basis of the above documents.

Article 8 The custodian or settlement agent shall open a special fund (RMB or/and foreign exchange) account (hereinafter referred to as the bond market fund special account) for overseas institutional investors with the business registration certificate generated in the capital account information system.

The income range of the special account for bond market funds is: the principal remitted by overseas institutional investors from abroad and related taxes (taxes, custody fees, audit fees, management fees, etc.), the proceeds from the sale of bonds, the principal and interest income recovered by bonds at maturity, the funds related to the transactions of bonds and foreign exchange derivatives that meet the requirements, the funds related to the settlement and sale of foreign exchange in China, and the funds in the special account for bond market funds of the same name are transferred to each other. Funds transferred from the domestic special account of QFII)/ RQFII with the same name, and other income that meets the requirements of the People’s Bank of China and the State Administration of Foreign Exchange.

The expenditure scope of the special account for bond market funds includes: payment of bond transaction price and related taxes, remittance of investment principal and income abroad, allocation of funds related to the transactions of bonds and foreign exchange derivatives in line with regulations, allocation of funds related to the settlement and sale of foreign exchange in China, mutual transfer of funds in the special account for bond market funds with the same name, allocation of funds in the domestic special account of QFII/RQFII with the same name, and other expenditures in line with the regulations of the People’s Bank of China and the State Administration of Foreign Exchange.

The funds in the special account of bond market funds shall not be used for other purposes than investing in China bond market.

Article 9 Where important information such as the name, custodian or settlement agent of an overseas institutional investor changes, the relevant custodian or settlement agent shall register the change in the capital account information system on behalf of the overseas institutional investor.

If an overseas institutional investor withdraws from the China bond market and closes the relevant capital account, it shall cancel the registration on behalf of the overseas institutional investor through the custodian or settlement agent within 30 working days after closing the relevant capital account.

Article 10 The funds in the QFII/RQFII domestic special account of the same overseas institutional investor and the funds in the bond market special account can be directly and bi-directionally transferred in China and used for domestic securities investment. Subsequent transactions, fund use and remittance shall follow the relevant management requirements of the transferred channels.

Article 11 Foreign institutional investors investing in the China bond market shall, in principle, keep the currencies of remitted and remitted funds consistent, and shall not carry out cross-currency arbitrage between RMB and foreign currency. If RMB+foreign currency is remitted for investment at the same time, the accumulated amount of remitted foreign currency shall not exceed 1.2 times of the accumulated amount of remitted foreign currency (except for the liquidation of investment). Long-term investment in the China bond market, the above ratio can be appropriately relaxed.

Article 12 Overseas institutional investors may conduct domestic RMB-to-foreign exchange derivative transactions according to the principle of hedging, and manage the foreign exchange risk exposure arising from investing in the China bond market.

Article 13 Overseas banking institutional investors may choose one of the following channels to conduct spot settlement and sale of foreign exchange and foreign exchange derivatives transactions:

(1) Dealing directly with custodians, settlement agents or other domestic financial institutions as customers.

(2) Apply to become a member of China Foreign Exchange Trading Center (hereinafter referred to as the Foreign Exchange Trading Center) and directly enter the inter-bank foreign exchange market for trading.

(3) applying to become a member of the foreign exchange trading center to enter the inter-bank foreign exchange market through the main brokerage business.

Article 14 Overseas non-bank institutional investors may choose one of the following channels to conduct spot settlement and sale of foreign exchange and foreign exchange derivatives transactions:

(1) Dealing directly with custodians, settlement agents or other domestic financial institutions as customers.

(2) applying to become a member of the foreign exchange trading center to enter the inter-bank foreign exchange market through the main brokerage business.

Article 15 If an overseas institutional investor chooses the channels specified in Item 1 of Article 13 and Item 1 of Article 14 of these Provisions, if he needs to open a special foreign exchange account in a domestic financial institution other than the custodian or settlement agent, he can handle it with the business registration certificate. This special foreign exchange account is specially used to handle fund delivery, profit and loss handling and margin management under spot settlement and sale of foreign exchange and foreign exchange derivative transactions, and cross-border fund receipt and payment shall be handled through the special fund account of the bond market.

Article 16 If an overseas institutional investor chooses the channels specified in Item 1 of Article 13 and Item 1 of Article 14 to conduct foreign exchange derivative transactions, it shall file the list of financial institutions with the foreign exchange trading center in advance by itself or through its custodian or settlement agent; The adjustment of financial institutions shall be filed with the foreign exchange trading center in advance.

Article 17 Foreign institutional investors shall abide by the following provisions when conducting foreign exchange derivatives transactions:

(1) The exposure of foreign exchange derivatives has a reasonable correlation with the exposure of foreign exchange risks. Foreign exchange risk exposure includes the principal, interest and market value changes of bond investment.

(2) When changes in bond investment lead to changes in foreign exchange risk exposure, adjust the corresponding exposure of foreign exchange derivatives within five working days or five working days at the beginning of next month.

(3) According to the actual needs of foreign exchange risk management, trading mechanisms such as extension, reverse liquidation, full or differential settlement can be flexibly selected, and profits and losses can be settled in RMB or foreign currency.

(4) Before trading foreign exchange derivatives for the first time, overseas institutional investors shall submit a written commitment to abide by the hedging principle to domestic financial institutions or foreign exchange trading centers.

Article 18 When handling the remittance and remittance of funds for overseas institutional investors, the custodian or settlement agent shall examine the authenticity and compliance of the corresponding fund receipt and payment, and earnestly fulfill the obligations of anti-money laundering and anti-terrorist financing. Overseas institutional investors shall cooperate with the custodian or settlement agent to perform the above responsibilities, and provide true and complete data and information to the custodian or settlement agent.

Article 19 Custodians, settlement agents and relevant domestic financial institutions shall follow the Measures for the Administration of RMB Bank Settlement Accounts (promulgated by Order No.5 of the People’s Bank of China [2003]), the Measures for the Administration of RMB Cross-border Receipt and Payment Information Management System (issued by Yinfa [2017] No.126) and the Notice of the General Office of the People’s Bank of China on Improving the Data Reporting Process of RMB Cross-border Receipt and Payment Information Management System (Yinban Fa []

Overseas institutional investors, custodians, settlement agents, relevant domestic financial institutions, etc. shall be in accordance with the Detailed Rules for the Implementation of Balance of Payments Statistics Reporting through Banks (issued by Huifa [2022] No.22), Guidelines for Balance of Payments Statistics Reporting through Banks (2019 Edition) (issued by Huifa [2019] No.25) and Statistics System for Foreign Financial Assets, Liabilities and Transactions. Notice of the State Administration of Foreign Exchange on Issuing the Specification for Foreign Exchange Business Data Collection of Financial Institutions (Version 1.3) (Huifa [2022] No.13) and other relevant regulations, and submit relevant information and data.

Article 20 Where domestic financial institutions handle spot settlement and sale of foreign exchange for overseas institutional investors in accordance with the channels specified in Item 1 of Article 13 and Item 1 of Article 14 of these Provisions, they shall fulfill their statistical and reporting obligations to the State Administration of Foreign Exchange in accordance with the spot settlement and sale of foreign exchange to customers; Where spot settlement and sale of foreign exchange are handled for overseas institutional investors through the channels specified in Item 2 and Item 3 of Article 13 and Item 2 of Article 14 of these Provisions, statistics shall be made according to the transactions in the inter-bank foreign exchange market.

Domestic financial institutions shall abide by the following provisions when handling foreign exchange derivatives business for overseas institutional investors through the channels specified in Item 1 of Article 13 and Item 1 of Article 14 of these Provisions:

(1) Submit the trading information of foreign exchange derivatives of overseas institutional investors daily according to the regulations of the foreign exchange trading center.

(2) To perform statistical and reporting obligations to the State Administration of Foreign Exchange as a foreign exchange derivative business for customers.

If an overseas institutional investor chooses the direct entry mode or the main brokerage mode in the inter-bank foreign exchange market to conduct foreign exchange derivatives trading, it shall submit relevant trading information in accordance with the provisions of the foreign exchange trading center.

Domestic financial institutions that handle spot settlement and sale of foreign exchange and foreign exchange derivatives business for overseas institutional investors in accordance with the channels specified in Item 1 of Article 13 and Item 1 of Article 14 of these Provisions shall comply with relevant regulatory provisions if they use third-party trading systems, platforms or facilities other than their internal trading systems.

Article 21 If overseas institutional investors, custodians, settlement agents and relevant domestic financial institutions commit the following related acts, the People’s Bank of China and the State Administration of Foreign Exchange shall punish them respectively according to the Law of the People’s Republic of China on the People’s Bank of China and the Regulations of People’s Republic of China (PRC) on Foreign Exchange Control:

(1) Failing to register as required.

(2) Failing to handle the settlement and sale of funds, the receipt and payment of foreign exchange or the remittance and remittance of funds in accordance with regulations.

(3) Failing to open or close an account as required, or failing to use an account as required.

(4) Failing to handle the business of foreign exchange derivatives according to regulations.

(5) Failing to report information and data as required, or reporting incomplete and untrue information and data, or providing false materials, data or certificates, etc.

(6) Failing to declare the balance of payments statistics and report on the settlement and sale of foreign exchange according to regulations.

Article 22 These Provisions shall apply to overseas central banks or monetary authorities, other official reserve management institutions, international financial organizations and sovereign wealth funds that invest in the China bond market through custodians or settlement agents (commercial banks).

Article 23 The materials submitted by overseas institutional investors in accordance with these Provisions shall be in Chinese. If both Chinese and foreign languages are submitted at the same time, the Chinese version shall prevail.

Article 24 The People’s Bank of China and the State Administration of Foreign Exchange shall be responsible for the interpretation of these Provisions.

Twenty-fifth the provisions shall come into force as of January 1, 2023. Notice of the State Administration of Foreign Exchange on Issues Concerning the Management of Foreign Exchange Accounts of Overseas Central Bank Institutions Investing in the Inter-bank Market (Huifa [2015] No.43), Notice of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Management of Foreign Institutional Investors Investing in the Inter-bank Bond Market (Huifa [2016] No.12) and Notice of the State Administration of Foreign Exchange on Issues Concerning the Improvement of Foreign Exchange Risk Management of Foreign Institutional Investors in the Inter-bank Bond Market (Huifa [2016])