China Interbank Bond Market Regulation and Market Access

China's interbank bond market has undergone significant regulation and reform in recent years to improve market access and stability. The China Securities Regulatory Commission (CSRC) has implemented rules to enhance investor protection and market transparency.

The interbank bond market in China is primarily regulated by the People's Bank of China (PBOC), which sets interest rates and monitors market liquidity. The PBOC also oversees the registration and trading of interbank bonds.

To access the China interbank bond market, foreign investors must obtain approval from the State Administration of Foreign Exchange (SAFE) and register with the China Securities Regulatory Commission (CSRC).

The China Interbank Bond Market is a significant player in the country's financial landscape. It has a total market size of over 70 trillion yuan.

The market's growth can be attributed to the increasing demand for fixed-income investments from institutional investors and high net worth individuals. With a vast pool of liquidity, the market offers a range of investment options.

The market's size and liquidity have made it an attractive destination for foreign investors, with many international investors participating in the market.

The CIBM market infrastructure is a complex system that brings together various players to facilitate trading. The China Foreign Exchange Trade System (CFETS) developed the trading system, which provides trade processing, training, and benchmark services.

CFETS acts as a trade repository, facilitating over-the-counter trading. This includes all products traded on the CIBM. The Shanghai Clearing House takes care of registration, depository, clearing, and settlement services.

The Shanghai Clearing House specifically handles Chinese government bonds, central bank bills, financial bonds, and enterprise bonds. The China Central Depository & Clearing Corporation provides credit risk mitigations and debt financing instruments.

Here's a breakdown of the main functions and fixed-income products of the key market participants:

Market Access Channels have come a long way in China. The People's Bank of China started a pilot program in 2010 for select overseas participants to invest in the China Interbank Market (CIBM).

Over time, this program expanded to qualified foreign institutional investors with set quotas by 2013. By 2016, these investors could invest without set quotas.

In 2017, Bond Connect was launched, providing greater convenience for overseas investors. This increased the scope of investable products available to them.

Bond Connect also allowed for real-time delivery versus payment, making it easier for overseas investors to buy and sell bonds.

The China Interbank Bond Market has a well-defined regulatory framework that allows international institutional investors to access various financial instruments.

Under the CIBM Direct regulation, these investors can access cash bonds, bond repo, and other derivatives.

The CIBM Direct scheme is designed to cater to a wide range of investors, including commercial banks and asset managers.

Pension funds, insurers, and securities houses also fall under the umbrella of approved investors.

Charitable funds and other long-term investors approved by the People's Bank of China are also eligible to participate.

The regulatory implications of China's interbank bond market are significant. The China Securities Regulatory Commission (CSRC) plays a crucial role in overseeing the market.

The CSRC has implemented various rules to ensure market stability and prevent systemic risk. One such rule requires banks to maintain a minimum capital adequacy ratio.

The CSRC has also established a framework for bond issuance and trading. This includes guidelines for bond pricing, disclosure, and reporting requirements.

China's capital markets are becoming increasingly open and accessible to foreign investors, thanks to recent changes in the Qualified Foreign Investor (QFI) regime.

These positive developments have been driven by structural changes made over the past few months, according to Securities Services.

Chinese capital markets are offering greater accessibility to foreign investors, which is a significant shift towards a more open and inclusive market.

We welcome the liberalisation of China's financial markets, a major step that enables international investors to diversify their fixed income portfolios and access the rapidly growing Chinese market.

In 2017, international credit rating agencies were allowed to establish a presence in China, making foreign investors more secure in gauging Chinese corporate debt.

Foreign institutional investors can rely on a single Bond Settlement Agent partner, such as BNP Paribas (China) Ltd., to access the onshore fixed income market.

This partner fully manages the administrative process required to gain access to the scheme and ensures a seamless process from trade execution to settlement and custody.

Since 2010, the People's Bank of China has been running a pilot program for select overseas participants to invest in the CIBM, with the program expanding to qualified foreign institutional investors with set quotas by 2013.

By 2016, these investors could invest without set quotas, and in 2017, Bond Connect was launched, providing greater convenience for overseas investors and increasing the scope of investable products.

Bonds in the CIBM are now included in Bloomberg Global Aggregate Indices, which took effect in April 2019, allowing for Exchange traded funds like KraneShares Bloomberg China Bond Inclusion ETF.

The CIBM has a significant impact on customers, requiring them to open multiple accounts with various institutions.

To participate in the CIBM, customers must open a new Clearstream Banking account. This is the first step in the process.

In addition to the Clearstream Banking account, customers must also open a Basic account with People's Bank of China (PBOC) and a Special account with PBOC. This is necessary for the CIBM to function smoothly.

Customers must also open an account with Shanghai Clearing House (SCH) and the China Central Depository & Clearing Co., Ltd (CDCC). These accounts are crucial for the settlement and clearing process.

Lastly, customers need to open an account with China Foreign Exchange Trade (CFETS). This account is necessary for foreign exchange transactions.

Here's a quick rundown of the accounts customers need to open:

The changes to China's Qualified Foreign Investor (QFI) regime have made Chinese capital markets more accessible to foreign investors.

These positive developments have seen Chinese capital markets open up, providing greater accessibility to foreign investors.

The QFI regime has undergone a number of structural changes over the past few months, enhancing access for investors.

Foreign investors can now explore investment opportunities in China, taking advantage of the increasingly open capital markets.

The China Interbank Bond Market comes with its own set of risk concerns. Liquidity risks are a major issue, with the market's size and depth often unable to meet investor demands.

The market's lack of standardization is another major concern. The absence of a unified pricing mechanism and inconsistent disclosure standards can lead to market volatility.

The high level of leverage in the market is a significant risk factor. As of 2020, the total outstanding interbank bond debt had reached 53.4 trillion yuan.

The market's dependence on a few large players is also a concern. The top 10 issuers account for nearly 70% of the market's total outstanding debt.

The lack of regulatory oversight is another risk factor. The market's self-regulatory mechanisms are often inadequate, leaving investors exposed to potential losses.

The market's susceptibility to economic downturns is a significant risk. The 2008 global financial crisis had a devastating impact on the market, with many investors suffering significant losses.