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`Limitless’ access to China’s bond market

More details on expanding overseas investor access to China’s interbank bond market (CIBM) were announced, although tax issues have yet to be clarified.

The State Administration of Foreign Exchange announced details on expanding overseas investor access to China’s interbank bond market (CIBM) last Friday, after stating in February that designated foreign “medium and long term institutional investors” are welcome to trade in the interbank bond market.

“Essentially, the rules call for limitless CIBM access: no quota, very light repatriation restrictions, virtually no approval time and the added ability to inject in any currency while allowing for derivatives to further hedge risks,” Z-Ben said in a report released on Tuesday.

The guidelines released on Friday said the registration process would take 20 days. The capital remittance can be denominated in either RMB or foreign currencies, but both the currency ratio and the amount of money withdrawn should be kept basically the same (deviate not more than 10%) of the initial capital inflow.

However, “taxation details have yet to be clarified,” said Z-Ben research director Ivan Shi.

A shortage of fund managers to handle the inflows might also be a problem. Other issues include clarifying the definition of “medium and long term institutional investors recognised by the PBOC including senior funds, charity funds and donation funds”, as well as the illiquidity of the CIBM, according to the consultancy.

HSBC Global Asset Management expects the CIBM to become the main investment channel used by foreign investors.

Despite valid concerns on defaults and mounting debts in mainland China, Z-Ben noted “a movement toward market-oriented pricing” is under way.

It forecast the Chinese fixed income market to grow to $17tr by 2021 from $7.4tr in 2015.

The next event to watch is the possible inclusion of onshore bonds in the flagship emerging markets indices, Shi said. 

HSBC GAM predicted 10% foreign participation in China’s overall fixed income market would translate to about $50bn of new inflow, as foreign investors only accounted for roughly 3% or $105bn of domestic bonds in China.

Part of the Mark Allen Group.