What are the implications?
The CIBM Direct take-up is not expected to go through the roof overnight. There are a lot of positives in the clarifications around the programme. However, the actual reckoning will come from usage and establishment as the norm. This is likely to take a while but should not dampen enthusiasm.
The latest developments will make inclusion of Chinese bonds into international bond indices more likely. This will be a big step in terms of recognition. It is likely to generate a significant impact on inflows from passive strategies alone as inclusions are made by the major index providers. This will position China as the emerging market with the most foreign-owned debt, even if it is still a small percentage of its total.
In terms of trading execution to settlement, foreign investors who are keen to invest into the CIBM Direct will need clarification on the local tax rules and be aware of the T+0 or T+1 settlement cycle. Hence, choosing the right partner as settlement agent or custodian will be crucial for the global teams to operate around the clock and manage streamlined processes across several parties to ensure trade are executed and settled promptly.
In addition, the developments will increase the international scrutiny on the ratings of bonds in China and the possibility of default, as noted above. We would expect to see this start a chain reaction that would ultimately lead to a more realistic and transparent bond market.
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