On July 20, the Office of Financial Stability and Development Committee under the State Council released a series of measures to further open up China’s financial sector, including the provisions that permit foreign-funded institutions to conduct credit rating business on all types of bonds in China’s inter-bank and exchange bond markets, and to obtain Type-A lead underwriting licenses in the inter-bank bond market; and China will further facilitate the investments of foreign-funded institutions in the inter-bank bond market. An official from the People’s Bank of China (PBC) interpreted the measures as follows.
1. Foreign-funded institutions will be permitted to conduct credit rating business on all types of bonds in China’s inter-bank and exchange bond markets.
It is a pivotal measure of China to open up its financial market through promoting the opening-up of the credit rating market and supporting foreign credit rating agencies’ entry into China’s inter-bank and exchange bond markets as well as their conduction of credit rating on all types of bonds. Credit rating is an important fundamental institutional arrangement of the financial market. As the internationalization of China’s financial market speeds up, introducing international credit rating agencies (CRAs) to China’s credit rating market will help satisfy diversified demands of international investors and improve the rating quality of China’s credit rating industry, thus benefiting the regulated and healthy development of China’s financial market.
Over the past several years, the PBC and the China Securities Regulatory Commission (CSRC) along with other relevant departments have been pushing for the steady opening-up of credit rating services. In July 2017, the PBC issued an announcement on issues concerning the opening-up of the credit rating industry (Announcement No. 7 [2017] of the PBC), declaring to open the inter-bank bond market to foreign CRAs. Meanwhile, as China forges ahead with the opening-up of its credit rating industry, wholly-owned companies or subsidiaries controlled by overseas CRAs in China may apply to the CSRC for providing credit rating services in the domestic securities market according to the Securities Law of the People’s Republic of China, the Company Law of the People’ s Republic of China, the Administrative License Law of the People’s Republic of China and the Interim Measures for Administration of Credit Rating Business on the Securities Market. In March 2018, the National Association of Financial Market Institutional Investors (NAFMII) released supporting rules to specify procedures and requirements in terms of the registration evaluation of such agencies. Foreign-funded CRAs may apply for credit rating businesses in relation to corresponding bonds and submit documents for registration evaluation. Those who have passed registration evaluation are permitted to provide credit rating services in the approved categories. On September 4, 2018, the Announcement of the People’s Bank of China and the China Securities Regulatory Commission on Issues Concerning the Provision of Bond Rating Services by Credit Rating Agencies on the Inter-bank Bond Market and the Stock Exchange Bond Market (Announcement No. 14 [2018] of the PBC and the CSRC) was released. It is stipulated that the PBC, the CSRC and the NAFMII would work together on the review of the qualification or registration procedures of CRAs, with a green channel set up for mutual accreditation of qualifications for CRAs that have been in operation in the inter-bank or exchange bond market. On January 28, 2019, S&P Ratings (China) Co., Ltd. was authorized to provide a full spectrum of credit rating services in China’s inter-bank bond market, including credit rating in relation to bonds issued by financial institutions, debt financing instruments for non-financial institutions, structured products and bonds issued by foreign entities in China’s inter-bank bond market.
Going forward, the PBC and the CSRC will advance the opening-up of the credit rating sector, continuously expand the rating scope of foreign CRAs, permit more qualified foreign CRAs to conduct all kinds of credit rating businesses in China’s inter-bank and exchange bond markets, push for a higher level of openness in the financial sector and promote the regulated and healthy development of China’s financial market.
2. Foreign institutions will be permitted to obtain Type-A lead underwriting licenses in the inter-bank bond market.
In recent years, the opening-up of China’s bond market has been gathering speed with growing overseas issuers, boosting investment by overseas investors and increasing number of foreign-funded intermediary institutions. At present, six foreign-funded banks have obtained Type-B lead underwriting or underwriting licenses for debt financing instruments of non-financial enterprises.
In order to implement the decisions and arrangements of the CPC Central Committee and the State Council on promoting a new configuration of all-round opening-up and beefing up the opening-up in financial service sector, the PBC has guided the NAFMII to study expansion of business scope of foreign-funded banks. After market evaluation, eligible foreign banks will be granted Type-A lead underwriting licenses, which permits them to expand business from debt financing instruments of overseas non-financial enterprises to all categories of debt financing instruments. Meanwhile, given that overseas parent companies of foreign-funded banks are interconnected in business with their subsidiaries in China, we will enhance examination on parent companies in terms of rules. The measure is going through procedures and will be released in the near future.
Permitting foreign banks to conduct Type-A lead underwriting business will enhance foreign institutions’ capacity to serve China’s real economy, enable them to participate in China’s economic growth in a wider and deeper manner and push forward the supply-side structural reform in the financial sector. It will also bring in more overseas investment to finance domestic enterprises through bond issuance, thus facilitating the financing and cost cut of the real economy, and easing difficulties in and high costs of financing. Meanwhile, it will bolster the sharing of achievements and opportunities of China’s economic growth with the international community, promote economic globalization, and achieve mutual benefits and win-win results.
3. China will further facilitate the investments of overseas institutions in the inter-bank bond market.
In recent years, the PBC has been rolling out and improving measures to further open up the financial market. Currently, overseas investors could make investments in the markets through various channels, including QFII/RQFII, direct investment and the Bond Connect, which effectively satisfies differentiated investment demands of diverse investors. However, the separation of different channels has caused inconvenience for a single overseas investor in terms of market access, bond transfer and fund transfer. In order to further facilitate the investments of overseas institutions in the inter-bank bond market and raise investment efficiency, it is necessary to integrate policy requirements of various channels and connect bond accounts as well as fund accounts. To that end, the PBC, collaborated with the State Administration of Foreign Exchange (SAFE), has drafted the Notice on Issues Concerning Further Facilitating Investments in the Inter-bank Bond Market by overseas Institutional Investors (Draft for Consultation) (hereinafter referred to as the Notice) after soliciting the opinions of settlement agents, custodians and overseas institutional investors. In addition, the PBC sought public comments on the Notice in May 2019 on its official website. The Notice is scheduled to be released and implemented soon.
The Notice addressed problems surrounding bond transfer, fund transfer, and repeated filing through different investment channels by single foreign institutional investor, thus facilitating investments in Chinese markets by overseas investors and reflecting the requirement of high-level opening-up of the financial market.
