THE INTER-BANK BOND MARKET IN THE PEOPLE’S REPUBLIC OF CHINA AN ASEAN+3 BOND MARKET GUIDE AUGUST 2020 THE INTER-BANK BOND MARKET IN THE PEOPLE’S REPUBLIC OF CHINA AN ASEAN+3 BOND MARKET GUIDE AUGUST 2020 Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2020 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org Some rights reserved. Published in 2020. ISBN 978-92-9262-341-8 (print), 978-92-9262-342-5 (electronic); 978-92-9262-343-2 (ebook) ISSN 2616-4663 (print), 2616-4671 (electronic) Publication Stock No. TCS200235-2 DOI: http://dx.doi.org/10.22617/TCS200235-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. 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In this report, international standards for naming conventions—International Organization for Standardization (ISO) 3166 for country codes and ISO 4217 for currency codes—are used to reflect the discussions of the ASEAN+3 Bond Market Forum to promote and support implementation of international standards in financial transactions in the region. ASEAN+3 comprises the Association of Southeast Asian Nations (ASEAN) plus the People’s Republic of China, Japan, and the Republic of Korea. The economies of ASEAN+3 as defined in ISO 3166 include Brunei Darussalam (BN; BRN); Cambodia (KH; KHM); the People’s Republic of China (CH; CHN); Hong Kong, China (HK; HKG); Indonesia (ID; IDN); Japan (JP; JPN); the Republic of Korea (KR; KOR); the Lao People’s Democratic Republic (LA; LAO); Malaysia (MY; MYS); Myanmar (MM; MMR); the Philippines (PH; PHL); Singapore (SG; SGP); Thailand (TH; THA); and Viet Nam (VN; VNM). The currencies of ASEAN+3 as defined in ISO 4217 include the Brunei dollar (BND), Cambodian riel (KHR), Chinese renminbi (CNY), Hong Kong dollar (HKD), Indonesian rupiah (IDR), Japanese yen (JPY), Korean won (KRW), Lao kip (LAK), Malaysian ringgit (MYR), Myanmar kyat (MMK), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), and Vietnamese dong (VND). Contents Tables and Figures v Foreword vii Acknowledgments viii Abbreviations ix I. Overview 1 A. Overview of Bond Market Segments 1 B. Introduction to the China Inter-Bank Bond Market 3 C. Outline of the Investment Schemes to Open the Capital Market 12 D. Market Opening Milestones in the China Inter-Bank Bond Market 14 since 2005 II. Legal and Regulatory Framework 19 A. Legal Tradition 19 B. English Translation 19 C. Legislative Structure 20 D. Inter-Bank Bond Market Regulatory Structure 23 E. Regulatory Framework for Debt Financing Instruments 30 F. Debt Financing Instrument Issuance Regulatory Processes 31 G. Continuous Disclosure Requirements in the Inter-Bank Bond Market 61 H. Self-Regulatory Organizations in the Inter-Bank Bond Market 63 I. Licensing and Admission of Inter-Bank Bond Market Participants 66 J. Membership Rules of the Inter-Bank Bond Market 66 K. Rules Related to Disclosure and Trading of Debt Financing Instruments 68 L. Market Entry Requirements (Nonresidents) 68 M. Market Exit Requirements (Nonresidents) 69 N. Regulations and Limitations Relevant for Nonresidents 70 O. Regulations on Credit Rating Agencies 80 P. Regulations on Bond Pricing Agencies 82 III. Inter-Bank Bond Market Characteristics 83 A. Definition of Securities and Debt Financing Instruments 83 B. Types of Bonds and Notes 85 C. Money Market Instruments 94 D. Segmentation of the Market 98 E. Methods of Issuing Bonds and Notes (Primary Market) 100 F. Governing Law and Jurisdiction (Bond and Note Issuance) 106 G. Language of Documentation and Disclosure Items 106 H. Registration of Debt Financing Instruments in the Inter-Bank Bond Market 107 I. Listing of Debt Financing Instruments 109 J. Methods of Trading Bonds and Notes (Secondary Market) 109 K. Bond and Note Pricing and Valuation 110 L. Transfers of Interests in Bonds and Notes 113 M. Market Participants 116 N. Definition of Professional Investors 130 O. Credit Rating Requirements 132 P. Financial Guarantee Institution 135 Q. Market Features for Investor Protection 135 R. Debt Financing Instrument Holder Meeting 138 S. Bond Trustee or Trustee 140 T. Bankruptcy and Insolvency Provisions 141 U. Event of Default and Cross-Default 143 IV. Bond and Note Transactions and Trading Market Infrastructure 145 A. Inter-Bank Bond Market 145 B. Trading Platforms 147 C. Trade Reporting 150 D. Market Monitoring and Surveillance 151 E. Bond Information Services 151 F. Yields, Yield Curves, and Bond Indexes 155 G. Repo Market 163 H. Securities Lending and Borrowing 167 I. Debt-Financing-Instrument-Related Derivatives in the Inter-Bank 168 Bond Market V. Description of the Securities Settlement System 171 VI. Fees and Taxation in the Inter-Bank Bond Market 172 A. Costs Associated with Bond and Note Issuance 172 B. Ongoing Costs for Issuers of Debt Financing Instruments 175 C. Costs for Deposit and Withdrawal of Debt Financing Instruments 176 D. Costs for Account Maintenance at the Central Securities Depositories 176 E. Costs Associated with Debt Financing Instrument Trading in the 177 Inter-Bank Bond Market F. Costs for Settlement of Bond and Note Transactions and Transfers 178 G. Taxation Framework 180 VII. Market Size and Statistics 184 VIII. Presence of an Islamic Bond Market 185 IX. Challenges and Opportunities in the Inter-Bank Bond Market 186 A. Challenges in the Inter-Bank Bond Market 186 B. Opportunities in the Inter-Bank Bond Market 190 X. Recent Developments and Future Direction 192 A. Recent Developments 192 B. Future Direction 197 Appendixes 1 Compliance with International Principles 200 2 Practical References 202 3 List of Laws and Regulations for the Inter-Bank Bond Market 203 4 Glossary of Technical Terms 208 5 Chinese Technical Terms and Their Interpretations 212 Tables and Figures Tables 1.1 Major Bond Market Segments in the People’s Republic of China 2 1.2 Debt Financing Instruments Issued in the CIBM and Deposited with CCDC 7 in 2019 1.3 Overview of Market Access Routes into the China Bond Market 13 2.1 Bond Market Legislative Structure in the People’s Republic of China 21 2.2 Examples of China Inter-Bank Bond Market Legislation by Legislative Tier 21 2.3 Supervisory Institutions and Instruments under their Remit 23 2.4 Bond Types, Issuer Categories, and Related Supervisory Institutions 24 2.5 Overview of Regulatory Framework for Debt Financing Instruments in the 30 Inter-Bank Bond Market 2.6 Authorities in the Regulatory Process for the Inter-Bank Bond Market by 32 Issuer Type 2.7 Registration Documents Required for a Public Offering and Private 49 Placement of Panda Bonds 2.8 Documentation Requirements for a Private Placement Registration 53 2.9 NAFMII Membership by Category and Details 64 2.10 QFII Quotas Granted by Economy or Region 72 2.11 Supervising Institutions for the QFII and RQFII Schemes 73 2.12 RQFII Quotas Granted by Economy and Region 75 2.13 Milestones Related to Nonresident Issuer and Investor Participation 76 2.14 Credit Rating Agencies Active in the China Bond Market 81 3.1 Government and Related Bonds Deposited by Market Segment 85 3.2 Enterprise Bonds Depository Balance by Market Type at the End of 2019 90 3.3 SME Collective Notes Issuance and Outstanding Deposits at SHCH 91 3.4 Debt Financing Instrument Issuance in the CIBM 98 3.5 Fungibility of Debt Financing Instrument among Major Market Segments 115 3.6 Business and Financial Indicators for Category I Issuers 118 3.7 Overview of Inter-Bank Bond Market Bond Accounts at CCDC 119 3.8 Overview of Inter-Bank Bond Market Bond Accounts at SHCH 120 3.9 Credit Rating Regulations and Provisions for the Inter-Bank Bond Market 132 3.10 Credit Rating Ranks for Short-Term Bonds in the Inter-Bank Bond Market 133 3.11 Credit Rating