On 20 July, 2019, the Office of the Financial Stability and Development Committee under the State Council ("FSDC") unveiled 11 new measures1 (the "New Measures") to substantially further open up China's financial sector to foreign investment. Immediately thereafter, the relevant regulators, namely, the People's Bank of China ("PBOC"), the China Securities Regulatory Commission ("CSRC") and the China Banking and Insurance Regulatory Commission ("CBIRC"), released pre-prepared explanatory comments on the New Measures on their official websites.2 In this Note, we will look at each of the New Measures, together with the corresponding explanatory comments.

Then on 11 October 2019, the CSRC announced an acceleration of the timetable for full liberalisation of the fund management, securities and futures sectors to foreign investment. These policies, when read together, should substantially open up (among others) China's bond underwriting market, insurance sector, fund management, securities and wealth/asset management industries, allowing foreign investors to tap into a trillion-dollar market and compete with their domestic counterparts on a more level playing field.

PBOC: further opening-up of bond market

Allowing foreign-funded institutions to conduct credit rating business for all kinds of bonds in China's interbank and exchange-traded bond markets

The credit rating business has been progressively opened up in recent years. In July 2017, the PBOC issued the Announcement on Matters relating to Opening-up of the Credit Rating Industry (People's Bank of China Announcement [2017] No.7) ("PBOC Announcement No.7"), specifying the opening-up policies of the credit rating industry in the interbank bond market. In March 2018, the National Association of Financial Market Institutional Investors ("NAFMII") issued rules3 detailing the specific procedures and requirements for the evaluation of credit rating agencies. Foreign-funded credit rating institutions may apply to conduct credit rating business for certain bonds. Foreign-funded credit rating institutions which have passed evaluation registration may carry out credit rating activities based on the type of bond rating business for which registration has been accepted. On 4 September 2018, the PBOC and the CSRC jointly issued Announcement [2018] No.14 ("PBOC/CSRC Announcement"), making it clear that the PBOC, CSRC and NAFMII will collaborate with each other in reviewing or registering the business qualifications of credit rating agencies in the bond market, and that those credit rating agencies that have carried out credit rating business in either the interbank or the exchange-traded bond markets will be offered 'green light channels' for mutual recognition of their credit rating business qualifications in other bond markets. The new measures set out in PBOC Announcement No.7 set the scene for more foreign-funded credit rating institutions to enter the Chinese market.

Standard & Poor's Credit Rating (China) Ltd. ("S&P China"), a wholly-owned subsidiary of S&P Global was established in Beijing on 28 January 2019, and was approved to conduct credit rating services in all categories in the Chinese interbank bond market, including financial institution bonds, debt financing instruments of non-financial enterprises, structured products and overseas entity bonds.

On 12 July 2019, S&P China released its first-ever rating report, which adopted a special rating system for the Chinese market in order to converge with China's home-grown rating system. However, S&P China has not yet obtained a rating qualification for the exchange-traded bond market. Nevertheless, based on the above PBOC/CSRC Announcement No.14, S&P China is eligible to apply for an exchange-traded bond market qualification, as it has already obtained a rating qualification for another relevant market.

Allowing foreign institutions to obtain a category A lead underwriting license in China's interbank bond market

Under the interbank bond market rules, bond underwriters are divided into two categories: (i) lead underwriters; and (ii) underwriters. Previously, foreign-funded banks were rarely allowed to become underwriters. In 2013, NAFMII further sub-divided lead underwriters into two categories: Category A and Category B, of which only the latter was open to foreign-funded banks.4 The difference between the two categories mainly lies in that Category A lead underwriters may conduct lead underwriting business nationwide for debt financing instruments of non-financial enterprises, while Category B lead underwriters may only conduct lead underwriting business within a specified scope, and need to conduct lead underwriting business jointly with Category A lead underwriters (which must be banks) for one year. After the one-year period has expired, they can conduct lead underwriting business on their own without collaboration with Category A lead underwriters.

Currently, only six foreign-funded banks have obtained interbank bond market underwriting licenses, with only three5 of them qualified as underwriters and another three6 qualified as Category B lead underwriters, but with their underwriting business scope further limited by the PBOC to debt financing instruments issued by offshore non-financial enterprises. In practice, this means that foreign-funded banks can only underwrite Panda Bonds, a rather small market (about RMB165 billion) when compared against the domestic credit bond market (about RMB7.3 trillion).7

The New Measures will allow foreign-funded institutions to obtain Category A lead underwriter qualifications and expand their business into underwriting issuance of all types of debt financing instruments nationwide. That means that foreign-funded institutions will be able to tap into the trillion-dollar credit bond market, and compete with their domestic counterparts on a more level playing field.

It has also been reported that the NAFMII is organizing market members to jointly study and formulate market assessment standards for Category A lead underwriting qualifications for foreign-funded institutions. Furthermore, in order to link Category A and Category B qualifications, the existing market assessment standards for Category B lead underwriter qualifications for foreign-funded institutions will also be revised. The formulation of the relevant assessment standards is expected to be completed and promulgated in the near future. The new assessment standards system will take full account of the linkage between the businesses of parent companies and subsidiaries of foreign-funded institutions inside and outside China, and intensify the level of due diligence investigations on the overseas parent companies of foreign-funded institutions.

Based on the comments made by PBOC, rules will be formulated to strengthen due diligence to be carried out on overseas parent companies of foreign-funded institutions, as the business of a parent company is closely linked to that of its subsidiaries. It could be argued that this is not 'national treatment', but is arguably justifiable at least to some extent given that the parent companies of domestic capital banks are already subject to regulatory oversight and supervision by PBOC, while the overseas parent companies of foreign-invested institutions are outside PBOC's geographical jurisdiction.

Taking further steps to facilitate foreign institutional investors to invest in interbank bond market

Currently, foreign investors can invest in China's interbank bond market through multiple channels, such as the Qualified Foreign Institutional Investor ("QFII") and Renminbi Qualified Foreign Institutional Investor ("RQFII") schemes, bond connect and direct investment in the interbank bond market ("direct investment"). However, using different market channels is costly and cumbersome to foreign investors in terms of market entry, bond transfers, fund transfers, and so forth. In order to further facilitate foreign institutional investment in the interbank bond market and to improve investment efficiency, integration of the policy requirements for different available channels, and opening up of bond and fund accounts is needed.

After soliciting opinions from settlement agents, custodians and foreign institutional investors, the PBOC, together with the State Administration of Foreign Exchange ("SAFE"), drafted the Circular on Issues concerning Further Facilitating Foreign Institutional Investors' Investment in the Interbank Bond Market (the "Bond Market Circular"), which was released for public comment in May 2019.

The final version was issued on 16 October 2019 with largely minor amendments, and will take effect from 15 November 2019. The Bond Market Circular resolves the issues relating to the transfer of bonds, transfer of funds and repeated record filings where the same foreign institutional investor has made investments through different channels, and streamlines foreign investment in the market. It allows the same foreign institutional investor to carry out non-trading bilateral transfers of bonds between bond accounts opened under the QFII/RQFII schemes and those opened under direct investment arrangements, and to directly transfer (bilaterally) the funds between QFII/RQFII custody accounts and direct investment fund accounts. Furthermore, if a foreign institutional investor invests through both QFII/RQFII and a direct investment channel, it will only be required to record-file once with the PBOC Shanghai Headquarters.

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