More policies luring investors to bonds

China issued more preferential policies to attract foreign investors to the bond market, including cutting taxes and easing foreign exchange regulations, to support the further opening-up of the financial sector, the central bank said.

The People's Bank of China, the central bank, quoted a notice issued by the nation's tax authorities on Thursday, saying foreign institutions' income from interest payments to hold bonds in the domestic market is temporarily exempted from corporate income tax and value-added tax from Nov 7, 2021 to Dec 31, 2025.

This policy was first mentioned at an executive meeting of the State Council on Oct 27. A statement after the meeting indicated China would extend the preferential tax policy for foreign investors participating in the domestic bond market, as part of its efforts to promote opening-up and attract foreign investment.

It is also an extension of the preferential tax policy from Nov 7, 2018 to Nov 6, 2021, which will help attract more foreign capital and encourage foreign investors to participate in domestic economic development through the bond market, Guan Tao, global chief economist at BOC International, told news media.

To streamline regulations of fund management of bonds issued by foreign institutions in China, known as the "panda bonds", the PBOC and the nation's foreign exchange regulator, the State Administration of Foreign Exchange, jointly issued a draft of new policies on Thursday for public opinion by Jan 1, 2022.

The rules relate to capital account management, capital remittance and cross-border collection and payment. They offered an integrated way to manage local and foreign currencies. There will be no restrictions on the retention of funds raised by panda bonds, according to a document posted on the PBOC's website.

Funds raised by the bonds can be remitted abroad or retained in China for domestic investment. Those for domestic use shall comply with the regulations on foreign direct investment and foreign debt, the draft said.

Financial regulators will allow foreign institutions to carry out foreign exchange hedging transactions for panda bonds in China, a measure of managing exchange rate risk, the PBOC said. In the meantime, the number and type of foreign exchange derivative counterparties of foreign institutions will not be limited.

Analysts from the financial market department of China Construction Bank thought the new rules aim to standardize panda bonds fund management methods in two markets: the interbank market under the supervision of PBOC and the exchange market supervised by the China Securities Regulatory Commission.

The move is conducive to improving the regulatory framework and promoting development of the nation's panda bond market, they said in a note issued on Friday.

China's government bonds were included in the FTSE World Government Bond Index on Oct 29, marking the third major global bond index inclusion following the Bloomberg Global Aggregate Index and JPMorgan GBI-EM Global Diversified Index. After years of development, China is currently the world's second-largest bond market.

"The inclusion has prompted the trading momentum and boosted liquidity of Chinese bonds in the international bond markets," said Wang Sheng, a member of the management committee and head of investment banking at CICC.