Bonds Sep 05

China sets up direct foreign service for interbank bonds

An electronic service, CIBM Direct, has been launched for foreign investors to trade bonds on China’s interbank bond market

China sets up direct foreign service for interbank bonds
Investors look at computer screens showing stock information at a brokerage house in Shanghai in this file photo from April 2016. Regulators in Beijing have introduced a further gateway for foreign investors to directly invest in the China interbank bond market. Photo: Reuters /Aly Song.

(ATF) An electronic service has been launched in the CIBM Direct scheme for foreign investors to trade bonds on China’s interbank bond market, according to a statement on Wednesday by the central bank's subsidiary National Interbank Funding Center (NIFC, also known as China's Foreign Exchange Trade System).

The new trading service under the CIBM Direct scheme started on September 1. It allows foreign investors to carry out cash bond transactions directly with market makers in China. A market maker is an entity that stands ready to buy or sell a security at any time and profits on the bid-ask spread.

This is another step in easing access into the world’s second largest bond market after the Bond Connect scheme was launched in 2017.

Similar to Bond Connect, the new direct trading service is enabled by linking facilities between the NIFC and Tradeweb or Bloomberg platforms. This allows foreign investors to use their familiar platforms to conduct request-for-quotes (RFQ-based) transactions.

Investors can send an RFQ to onshore market makers via a Tradeweb or Bloomberg terminal. Market makers will respond with executable pricing on the NIFC platform, which is sent to investors for confirmation. Investors can then confirm the trade on the terminal.

Prior to the introduction of this service, foreign investors trading bonds through the CIBM Direct scheme had to go through an agent bank, which entered the information and conducted transactions on behalf of investors.

“The introduction of the direct transaction service has significantly improved efficiency and reduced operation risks. It helps to encourage foreign investors to invest more actively in the onshore bond market,” HSBC China, one of the market makers for the program, said in a statement.

According to a report by 21st Century Business Herald, the direct transaction service will likely make CIBM Direct more competitive compared with Bond Connect, when with similar efficiency investors may be able to conduct not only cash bond transactions but also bond forwards, forward interest rate agreements, and interest rate swaps based on their hedging needs. With Bond Connect, they can only trade cash bonds at present.

On the first day of the service launch, a number of foreign institutions such as AllianceBernstein LP, UBS Asset Management, PIMCO, Standard Chartered Hong Kong, and HSBC Hong Kong completed 17 bond transactions totalling 560 million yuan (US$81.9 million) with onshore market makers such as Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, Construction Bank of China, HSBC China, and Guotai Junan Securities, the NIFC statement said.

Settlement agents

ICBC, HSBC China, Standard Chartered China and CITIC acted as the settlement agents in these transactions.

China’s domestic bond market has drawn huge foreign fund inflows, with yield differentials over other markets widening in a risk-averse environment, as the world’s second-largest economy becomes the first to recover from the deadly coronavirus pandemic.

As of September 3, China’s 10-year government bond yield paid a 250 basis points premium over equivalent US Treasuries, drawing increased foreign capital inflows.

Bond Connect data shows 130.4 billion yuan (US$19.1 billion) of foreign inflows in August, and the accumulative amount of all foreign holdings was put at 2.8 trillion yuan ($409 billion).

China now offers four main channels for foreign investors to invest and trade in the onshore bond market – the long-established Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII), the China Interbank Bond Market (CIBM) Direct Access Scheme launched in 2016, and Bond Connect launched in 2017.

In a move to encourage more foreign investors in China’s bond market, finance officials in Beijing recently announced a new draft regulation that aims to simplify application procedures for foreign bond investors and unify rules for various investment channels.

SEE ALSO: China to roll out red carpet for foreign investors in bonds