––
RMB Focus
MARCH 2016
I.
•
PBoC Circular No.2 for management of Over-The-
•
China Interbank Bond Market (CIBM) further opens up to offshore investors
•
CFETS Notice No.7 for overseas RMB Participating Banks to enter China interbank FX
market
usiness in CIBM
•
II.
•
PBoC announced a Reserve Requirement Ratio (RRR) cut of 0.5%
•
Interview on Mr.Zhou Xiaochuan regarding RMB exchange rate
•
PBoC emphasises on a better management of money supply
•
China granted RMB 50 billion quota to six banks for bad loan securitisation
•
SAFE caps buying of insurance products overseas at USD 5,000
•
China suspended QDLP scheme to control capital outflow
•
•
China and Georgia to push forward the comprehensive FTA in 2016
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I.
Following PBo
past five months, RMB exchange rate spurred biggest rally since 2005 by 1.2% on February 15th.
Clear signal has been conveyed that Chinese authorities are prioritising currency stability over
RMB internationalisation in the current stage of economic transition. Onshore financial reform
keeps progressing with the relaxation on management of OTC business in CIBM (PBoC Circular No.
2)
. Meanwhile, burdened with
heavy pressure on RMB depreciation and capital outflow, authorities have implemented a series of
policies to encourage capital inflow such as the simplified rules for investment in CIBM (PBoC
Notice No.3), the introduction of base quota calculation mechanism for QFII scheme (SAFE
Circular No. 2) and the supplementary rules on application procedures for Overseas RMB
Participating Banks to directly access CFETS for FX trading (CFETS Notice No. 7).
-
-
PBoC issued Circular No.2 Management of OTC Business of China Interbank Bond Market ( CIBM )
on February 14th, effective immediately.
–
Enlarge CIBM investment scope for qualified individuals and corporates
QICs are allowed to invest in OTC Products for bond spot trading, pledged repo and buyout
repo, while previously only certificate treasury bonds were available. Repo provides a direct
way for QICs to add leverage and finance from China Foreign Exchange Trading System
)
–
QFIs and related products issued by QFIs can invest in all types of Eligible OTC Products which
were restricted to individuals and corporates. Under this new regulation, QFIs can access
CIBM not only via direct connection of CFETS but also the Eligible OTC Products trading
platform. Despite the difference in listing requirement (approval for CIBM vs registration for
exchange bond market), the extension of investor eligibility can make CIBM more competitive
and pave the way for the potential bond cross-market trading.
–
Add new quotation mechanism
Request quotation initiated by Eligible Investors is allowed under this new regulation.
–
This Circular carries a major potential impact for BNP Paribas (China) Ltd. which can
provide Eligible Investors with full agency services of OTC Products thanks to its Type A
license.
RMB Competence Centre - Page | 2
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–
Opening the QICs access to inferior rating bonds could mean that PBoC and NAFMII might
adopt a much flexible underwriting system going forward. The ease of acquiring and
placing liquidity by QICs, which never happened before, is a continuous evolution of the
interest rate liberalisation effort in China.
I. D
Financial Institutions
act as secondary agents to open bond
accounts, distribute bonds, conduct custody and settlement, and pay interest and principle for
Eligible Investors via sales network and electronic channel.
II. FIOTC Qualifications
–
–
Active market makers or banks with Type A license in CIBM
Financial institutions with direct access to both
o CFETS;
o CIBM Bond Custody and Settlement Institutions e.g. China Central Depository and
Clearing Corporation or Shanghai Clearing House.
III. Application Documents
Qualified financial institutions should submit below information to PBoC for record within 1
month after the start of OTC Business:
–
–
–
–
1
Plan for OTC Business and operation settlement;
Department structure and staff organisation for OTC Business;
OTC Business management system, risk prevention mechanism, investor appropriate
management system1 and accounting method;
System connection approvals issued by CFETS and CIBM Bond Custody and Settlement
Institutions.
System created by PBoC to ensure that FIOTC sell products to Eligible Investors based on their risk tolerance
IV. Eligible OTC Products
–
–
Bond spot trading, pledged repo, buyout repo and other products approved by PBoC.
Bond type: Government Bond, Local Government Bond, Policy Bank Financial Bond, China
Development Bank Bond and newly-issued bond targeted at Eligible Investors.
V. Eligible Investors
Eligible Investors include Qualified and Unqualified Investors.
Qualified Investors who meet at least one of the following requirements can purchase all types of
Eligible OTC Products:
–
Financial institutions approved by the State Council;
RMB Competence Centre - Page | 3
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–
–
–
–
Investment companies or asset management companies with net asset or AUM not lower
than RMB 10 million;
Wealth management products, security investment funds and other investment projects
launched by above financial institutions, investment companies and asset management
companies;
Corporates with net asset not lower than RMB 10 million;
Individual investors with more than two-year security investment experience, annual
income not lower than RMB 0.5 million and financial asset not lower than RMB 3 million.
Unqualified Investors can only trade bonds rated AAA or above, and conduct repo business.
VI. Rules for OTC Business
–
–
–
–
FIOTC can provide trading quotation service via bilateral quotation or request quotation
o Bilateral quotation: FIOTC constantly and publicly quote for Eligible Investors.
o Request quotation: Eligible Investors initiate request to FIOTC for quotation of
certain bonds.
anism for cash clearing and bond
settlement.
Eligible Investors can open bond accounts in different FIOTC and apply for transfer of bond
custody among these bond accounts.
Without approval from PBoC, institutional investors who have opened account in bond
custody and settlement institutions cannot open bond accounts in FIOTC.
FIOTC can open general account in CIBM Bond Custody and Settlement Institutions to settle OTC
Products of Eligible Investors and strictly separate them from proprietary bonds.
PBoC released Circular No.3 regarding qualified offshore institutional investors participating in
CIBM on February 24th, effective immediately.
− Broaden qualified offshore institutional investors definition and remove their Direct
Interbank Access quota, which means they can directly participate in CIBM without license.
− Simplify investment procedure. Qualified offshore institutional investors can participate in
CIBM after registering with PBoC and opening relevant accounts via banks with Type A
license whereas previously PBoC approval was required.
− Encourage qualified offshore institutional investors to conduct medium and long term
investment in CIBM.
− As one of the four foreign banks with Type A license, BNP Paribas (China) Ltd. can provide
full agency services to qualified offshore institutional Investors for investments in CIBM.
RMB Competence Centre - Page | 4
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−
Qualified offshore institutional Investors:
1. Financial institutions e.g. banks, insurance companies, security companies, fund
management companies, other asset management companies and investment products
of these financial institutions.
2. Medium and long term investors e.g. pension funds, charity funds, donation funds.
−
Qualified offshore institutional Investors should entrust a bank with Type A license for
bond custody and clearing. Bank with Type A license can provide following services:
1. File with PBoC to invest in CIBM.
2. Assist to open, modify and cancel RMB special account, bond account, capital
settlement account and bond trading account.
3. Conduct bond trading and settlement as per order of qualified offshore institutional
investors.
4. Arrange interest and principle payments.
5. Asset custody, report processing, accounting and valuation.
−
Qualified offshore institutional Investors are permitted to trade cash bonds and other
products allowed by PBoC.
−
This circular applies to Qualified Foreign Institutional Investors and RMB Qualified Foreign
Institutional Investors.
−
Foreign official institutions should still follow previous rules as per PBoC Circular No. 220,
2015.
ement of Qualified Foreign Institutional
th
February 4 , effective immediately.
−
Remove quota limit. Investors can establish a base quota calculated according to their
asset or AUM.
−
Simplify quota application. No SAFE approval but only registration is required if
investment is within the base quota. SAFE approval is required for investment amount
exceeding base quota.
RMB Competence Centre - Page | 5
––
−
Ease initial investment injection and repatriation process. Deadline for initial investment
injection is removed. Open-end fund can be purchased and redeemed daily.
−
Shorten lock-up period of initial investment from 1 year to 3 months. Repatriation remains
under instalment rule with monthly net outflow not exceeding 20% of total onshore asset.
− QFII quota of BNP Paribas may be increased under the new base quota calculation
mechanism.
− The revised regulation shortens lock-up period and allows open-end funds to be
subscribed and redeemed daily, which enables QFII to have a better access to liquidity.
− It is a further opening-up of onshore capital market with the aim to boost inbound
investment and attract more foreign institutional investors. Currently, the total size of QFII
quota has reached USD 150 billion but only about USD 80 billion has been allocated by
SAFE, so there is still huge potential in QFII market.
− The new base quota calculation mechanism addresses concerns raised by MSCI in 2015
regarding A-share inclusion (quota limit, liquidity restriction and direct beneficial right)
and will increase the probability of A-shares inclusion into MSCI. Should A-shares account
for 5% in MSCI index, it would potentially represent roughly RMB 90 billion capital inflow
to China.
I. Investment Quota Management
Accumulative amount of net capital inflow for each QFII cannot exceed the investment quota
registered or approved by SAFE.
Base quota
−
−
−
Maximum: no more than USD 5 billion
Minimum: no less than USD 20 million
For QFII with major asset or AUM registered offshore
Base quota = USD 100 million + average asset or AUM in recent three years * 0.2% - RQFII
quota granted
−
For QFII with major asset or AUM registered onshore
Base quota = RMB 5 billion + total asset or AUM by the end of previous year * 80% - RQFII
quota granted
−
Base quota for financial official institutions such as sovereign wealth funds, central banks
and monetary authorities are only subject to USD 5 billion quota limit.
−
Base quota is denominated in USD, all the FX conversion should use the rate released by
SAFE at the end of previous month.
RMB Competence Centre - Page | 6
––
For QFII with existing quota, no SAFE approval but only registration is required if total quota
(existing quota + newly applied quota) remains within base quota. SAFE approval is required if the
existing quota or total quota exceeds base quota.
Lock-up period, which starts when net inflow of initial investment reaches USD 20 million or
equivalent, is shortened to 3 months.
II. Application Documents
For investment within base quota, QFII should submit the following documents to custodian for
record:
−
−
−
−
−
Basic information of investment for record;
Registration Form for Qualified Foreign Institutional Investors;
Audited financial statements or AUM reports for the recent three years or previous year;
Copy of the Certificate of QFII issued by CSRC;
Filing Form for Investment Quota of Qualified Foreign Institutional Investors (Custodian
should submit the Filing Form to SAFE within the first 10 days of the month).
For investment exceeding base quota, QFII should submit the following documents to SAFE via
custodian for approval:
−
Written application of QFII and its custodian with detailed explanations for increasing
quota and utilisation of current investment quota;
−
Audited financial statements or AUM reports for the recent three years.
III. Account Management
−
and openend funds. Afterwards, RMB special deposit accounts should be opened accordingly with
custodian or banks.
−
Capital in both accounts cannot be used for other purposes except onshore securities
investments.
IV. FX Management
− FX funds can be converted into RMB and transferred to the special deposit account 30
days before actual investment starts.
− After the lock-up period, QFII can repatriate initial investments and profits by instalment.
The cumulative monthly net outflow (including initial investments and profits) shall not
exceed 20% of total onshore asset by the end of previous year.
− Open-end fund can transfer in or out the net amount of the subscription or redemption on
a daily basis by its custodian bank. The monthly cumulative net outflow shall not exceed
20% of fund total onshore asset by the end of previous year.
RMB Competence Centre - Page | 7
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− Repatriation of profit from other products is subject to provision of audit report and tax
certificates.
V. Comparison
Previously
−
Size of quota
−
−
Lock-up
period
−
−
−
Frequency of
cross-border
flows (openended funds)
−
−
Frequency of
cross-border
flows (other
products)
−
−
FX
management
−
New scheme
More than USD 1 billion for
sovereign funds, central banks or
monetary authorities
From USD 50 million to USD 1
billion for others
−
3-month for pension funds,
insurance funds, mutual funds,
charity funds, endowment funds,
government and monetary
authorities, and open-ended
China funds
12-month for other QFII products
−
3-month for QFII products
Weekly on net basis
Monthly net outflows cannot
total
onshore asset by the end of
previous year
For each outward remittance, its
initial investment vs profit must
be determined so that only initial
investment amount can be
reinvested
−
−
Daily on net basis
Monthly net outflows cannot exceed
total onshore asset by
the end of previous year
Monthly net outflows cannot
exceed 20% of total onshore asset
by the end of previous year
Repatriation of profit is subject to
provision of audit report and tax
certificates
Repatriation of principal is
subject to SAFE approval, and
quota is reduced accordingly
−
Monthly net outflows cannot exceed
20% of total onshore asset by the end
of previous year
Repatriation of profit is subject to
provision of audit report and tax
certificates
FX funds can be converted into
RMB and transferred to the
special deposit account 10 days
before actual investment starts
−
−
−
Quota limit is removed. Investors can
establish a base quota calculated
according to their asset or AUM
No SAFE approval but registration is
required if investment is within the
base quota. SAFE approval is required
for investment amount exceeding
base quota.
FX funds can be converted into RMB
and transferred to the special
deposit account 30 days before
actual investment starts
RMB Competence Centre - Page | 8
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According to China Foreign Exchange Trading System (CFETS) announcement on January 29th 2016,
overseas RMB participating banks, with large volume of RMB purchases and sales, regional
presence and international reputation
can apply to become members of
CFETS to trade FX spots, forwards, swaps and options directly via CFETS.
All the transactions should be conducted for real business need and Participating Banks should
monitor capital outflow and be able to present trade documents to PBoC for inspection.
Since September 2015, PBoC and SAFE have released a number of regulations allowing offshore
banks to enter China Interbank FX Market:
–
–
–
–
Effective September 30th
and monetary authorities, international financial institutions, sovereign wealth funds, are
allowed to trade in CFETS (PBoC Circular No.31).
Effective November 25th 2015, first batch of 7 FOIs are allowed to access China Interbank
FX Market.
Effective December 21st 2015, SAFE relaxed rules allowing Participating Banks, after being
a member of CFETS, to enter China's onshore interbank FX Market, with implementation
details to follow (SAFE Circular No.40).
Effective January 12th 2016, second batch of 7 FOIs are permitted to enter China Interbank
FX Market.
This announcement supplements SAFE Circular No.40 (December 2015) with detailed rules on
application procedure and technical operation for Participating Banks to have direct access to
CFETS.
It is an opening up of China onshore FX market with the aim to add more types of market
participants and extend cross-border FX trading channels. On December 13th 2015, PBoC
suspended sev
CNY/CNH arbitrage. One of the reasons for suspension is the difficulty in validating the trade
background of those transactions. Compared with RMB purchases and sales via onshore clearing
banks, direct access to CFETS can provide a more transparent and regulated trading mechanism
for PBoC and SAFE to inspect cross-border transactions.
PBoC is trying to strike a balance between internationalising RMB and curbing capital outflow to
stabilise RMB. PBoC still encourages outbound direct investment and cross-border trade-related
transactions to support and benefit real economy.
RMB Competence Centre - Page | 9
––
BNP Paribas (China) Ltd. may lose opportunity as agent bank due to competition from direct
Participating Banks of CFETS, while BNP Paribas overseas entities with RMB cross-border
transactions can apply to trade directly via CFETS.
I. Qualification
Participating Banks can apply to CFETS for China Interbank FX Market membership and conduct
FX transactions including spot, forward, swap, CCS and option through CFETS trading system.
II. Application Documents
1. An application report. Its content includes, but is not limited to:

Basic information of the institution;

purchases and sales business, including business
scale and scope, product type, client information, etc.

Promise to strictly abide by related rules of RMB purchases and sales business,
including:
o Business scope;
o Product type;
o Corporate clients conducting RMB purchases and sales business with Participating
Banks shall complete related payments in the same bank;
o Pay close attention to abnormal transactions;
o Monitor the capital flow of block trades and report related information to PBC
through CFETS system in a timely manner.

Guarantee the authenticity of RMB purchases and sales business and report related
information through CFETS system in accordance with related requirements.
2.
Chinese version.
3. Internal operation procedure for trading in China Interbank FX Market.
4. The policies of risk management and RMB purchases and sales business information
reporting related to trading in China Interbank FX Market.
5. CFETS RMB/FX Membership Application Form.
6. CFETS Network Connection Application Form.
7. CFETS FX Trading System Digital Certificate Application Form.
8. Copies of the Certificate of FX Trader issued by CFETS (each institution shall have at least
two certified FX traders).
9. Name, resume and contact information of related managing staff and principal trading
staff.
10. Other documents required by CFETS.
RMB Competence Centre - Page | 10
––
All aforementioned application documents and completed forms shall be stamped with official
seal or signed by authorised signatory (attached with signature authorisation).
III. Application Procedure
1. Qualified Participating Banks submit application documents to CFETS.
2. CFETS sends the Member Agreement to institutions that have submitted complete
application documents and met the statutory requirements.
3. The institutions complete preparation work, including signing Member Agreement,
finishing network connection and attending trader training program.
4. CFETS sends formal market entry notice to the institutions approving the membership of
China Interbank FX Market and publishes public announcement through
www.chinamoney.com.cn.
IV. Information Reporting
Participating Banks acquiring the membership of China Interbank FX Market and conducting RMBFX transactions through CFETS trading system shall report related details of RMB purchases and
sales through the information reporting panel in CFETS Post-trade Processing Platform at the end
of each trading day (no later than 8:00 AM of the next trading day). Reported details include the
name of the parties that purchase or sell RMB, their nationality and region, transaction amount
and purpose, etc. The counterparties of Participating Banks are not obligated to report relevant
information through the RMB Cross Border Payment & Receipt Management Information System
(RCPMIS).
V. Others
1. Participating Banks can connect to CFETS trading system directly via leased line or MPLS/
VPN.
2. Participating Banks can choose to use CFETS Post-trade Processing Platform to complete
back-office trade confirmation with their counterparties.
3. Current China Interbank FX Market regulations and practices on network connection
requirements, technical standards and fee schedule shall be applied to Participating Banks.
4. Participating Banks acquiring the membership and trading in China Interbank FX Market
shall no longer trade via domestic agent banks.
Source: CFETS
RMB Competence Centre - Page | 11
––
II.
On February 29th, PBoC announced a Reserve Requirement Ratio (RRR) cut of 0.5% for all the
financial institutions, effective from March 1st. According to market estimation, the RRR cut will
release around RMB 700 billion liquidity. After the adjustment, the RRR for BNPP China will be 15%.
Source: PBoC, BNP Paribas
On February 15th, Chinese magazine Caixin Weekly published an exclusive interview with PBoC
governor Zhou Xiaochuan.
Takeaways of the interview:
1. In times when forex speculation becomes the main conflict, RMB internationalisation will
concede to RMB exchange rate stability in terms of importance.
2. A managed floating exchange rate regime is still necessary. PBoC will not let speculative
forces dominate market sentiment, but this does not mean they must take direct action
every time they face speculators. PBoC will effectively use their "ammo" to minimise cost.
3. The theme for RMB exchange rate regime is strengthening the reference against a basket
of currencies, not pegging to the basket of currencies. PBoC will improve communication
with the market. There will be better stability in RMB basket exchange rate and more twoway fluctuation of RMB against the USD.
4. There is no basis for continued RMB depreciation: China's current balance of payments is
in good condition; global competitiveness is still strong; cross-border capital flow is within
the normal range; RMB exchange rate against a basket of currencies remains basically
stable.
5. PBoC will continue to reinforce control on illegal capital flows. But there is no control on
normal operating forex strategy changes, liability structure adjustments, remittance of
profits cross border, forex purchases for the purpose overseas M&A and setting up
subsidiaries offshore.
Source: Caixin Weekly, BNP Paribas
PBoC started to conduct open market operation on a daily basis according to the announcement
issued on February 19th; previously, the frequency of such operation is twice a week. Normally,
PBoC manages liquidity in the market through repurchase agreement or reverse-repurchase
agreement; the new movement will lead the central bank to a better management of short term
liquidity in the banking system.
Source: Ejinsight
RMB Competence Centre - Page | 12
––
-high of RMB 1.27 trillion in 2015,
China has granted RMB 50 billion quota for six large banks to issue asset-backed securities (ABS)
with non-performing loans as underlying assets. This will provide a fresh channel for domestic
commercial banks to liquidate trouble loans and better manage non-performing loan ratio.
The six banks are Industrial and Commercial Bank of China (ICBC), China Construction Bank,
Agricultural Bank of China (AgBank), Bank of China (BOC), Bank of Communications (BoCom) and
China Merchants Bank.
Source: Reuters
To prevent capital outflow, China's SAFE capped the use of UnionPay bank cards to purchase
insurance products offshore at USD 5,000 per transaction, effective from February 4th. Since RMB
started to depreciate last year, offshore insurance policies become more and more popular. The
amount of insurance policies purchased by mainland visitors achieved HKD 21.1 billion in 2015, a
y/y increase of 64%.
Source: Bloomberg
In order to curb capital outflow and stabilize RMB exchange rate, China has suspended the quota
issuance for QDLP scheme and delayed the launch of QDII2 scheme, according to Financial Times.
China is experiencing a tough time due to sluggish economic growth and heavy pressure on RMB
depreciation. In January, China's foreign exchange reserves declined by USD 99.5 billion from a
month earlier to USD 3.23 trillion, hitting the lowest level since 2013.
Qualified Domestic Limited Partners (QDLP) Programme was originally launched in 2013 with the
aim to provide a new channel for foreign asset managers to raise fund onshore and invest into
overseas securities markets. All together 11 foreign funded asset managers have been granted
licenses and quota. But since August last year, SAFE hasn't approved any new quota for QDLP
scheme, which clearly shows its intention to clamp down on outbound investment channels.
Source: Financial Times, BNP Paribas
On February 23rd, Christine Lagarde who is the managing director of the IMF showed her supports
believed that
would
not face a hard landing situation and such transformation
.
Source: Xinhua
RMB Competence Centre - Page | 13
––
On February 22nd, the first round of negotiations between China and Georgia regarding a free
trade agreement was officially launched. Two countries are expected to achieve a comprehensive
deal within 2016. China is now the 4th largest trading partner for Georgia; the FTA will further
benefit economy of both countries. In December 2015, Chinese Mistry of Commerce and Georgian
economic department signed a memorandum of understanding to start the FTA negotiations.
Source: Xinhua
RMB Competence Centre - Page | 14
––
This document is CONFIDENTIAL AND FOR DISCUSSION PURPOSES ONLY and does not constitute an offer or a solicitation to
engage in any trading strategy, to purchase or sell any financial instruments or to enter into any transactions. Given its general
nature, the information included in this document does not contain all the elements that may be relevant for an investor to make
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RMB Competence Centre - Page | 15