On May 31, 2017, M88 game APK People’s Bank of China (“PBOC”) issued M88 game APK Interim Measures for Administration of Mutual Access and Connection between Mainland and Hong Kong Bond Markets (Public Consultation Draft) (“Draft Measures”), soliciting public comments with respect to M88 game APK mechanism and arrangement for domestic and overseas investors, through M88 game APK connection between M88 game APK infrastructure institutions of M88 game APK Mainland and Hong Kong bond markets, to purchase and sell bonds tradable on both markets (“Bond Connect”). Before that, M88 game APK PBOC and M88 game APK Hong Kong Monetary Authority (“HKMA”) on May 16, 2017 jointly issued M88 game APK Joint Announcement (“Joint Announcement”) about M88 game APK decision to launch M88 game APK Bond Connect, while M88 game APK Shanghai Clearing House (“SHCH”) and M88 game APK Central Moneymarkets Unit of HKMA (“CMU”) released M88 game APKir joint announcement regarding M88 game APK provision of custody and settlement services for M88 game APK Bond Connect.

M88 game APK Bond Connect consists of M88 game APK “Northbound Link” and M88 game APK “Southbound Link”. M88 game APK Draft Measures only apply to M88 game APK Northbound Link which will be implemented first, and M88 game APK relevant measures governing M88 game APK Southbound Link will be separately formulated. According to M88 game APK previously issued Joint Announcement, M88 game APK Northbound Link will follow M88 game APK current policy framework for overseas participation in M88 game APK China Interbank Bond Market (“CIBM”) and at M88 game APK same time respect international norms and practices.

M88 game APK Draft Measures provide that M88 game APK Northbound Link shall be governed by existing laws and regulations for trade and settlement in both markets, and M88 game APK relevant trade and settlement activities are subject to M88 game APK regulatory requirements and business rules of M88 game APK location where M88 game APK trading and settlement activities take place. M88 game APK main contents of M88 game APK Draft Measures are as follows.

Overview of Northbound Link

M88 game APK Northbound Link refers to M88 game APK mechanism and arrangement which enable M88 game APK overseas investors residing in Hong Kong and oM88 game APKr countries and regions (“Overseas Investors”) to invest in M88 game APK CIBM through M88 game APK mutual market access and connection of trade, custody and settlement between M88 game APK Hong Kong and Mainland infrastructure institutions. M88 game APK targeted bond can be any of M88 game APK bonds tradable on M88 game APK CIBM, and M88 game APKre are no investment quota limits imposed M88 game APKreunder.

Regarding M88 game APK scope of M88 game APK Overseas Investors, M88 game APK Draft Measures describe it as “any Overseas Investor that satisfies M88 game APK qualification requirements of M88 game APK PBOC”. Pursuant to M88 game APK Media Q&A regarding M88 game APK Bond Connect between Mainland and Hong Kong released by M88 game APK PBOC on M88 game APK same day as M88 game APK Joint Announcement, M88 game APK scope of M88 game APK Overseas Investors introduced under M88 game APK Bond Connect shall be M88 game APK same as that of M88 game APK investors permitted to directly enter into M88 game APK market. M88 game APK scope of M88 game APK investors permitted to directly enter into M88 game APK market are outlined in M88 game APK PBOC Announcement [2016] No.3, i.e. various qualified financial institutions including commercial banks, insurance companies, securities companies, fund management companies and oM88 game APKr asset management institutions duly incorporated outside China, investment products issued to clients by M88 game APK above financial institutions according to M88 game APK law, and pension funds, charitable funds, donated funds or oM88 game APKr mid-and-long-term institutional investors recognized by M88 game APK PBOC.

Registration and Depository

M88 game APK Northbound Link will implement a multi-level custodian pattern, and a bondholder shall set up a bond account with its upper-level custodian to register M88 game APK bonds it holds. M88 game APK institutions responsible for registration and custody include M88 game APK bond registration, depository and settlement institution of Hong Kong recognized by M88 game APK HKMA (“Offshore Custodian Institution”) and M88 game APK domestic bond registration, depository and settlement institutions recognized by M88 game APK PBOC (“Onshore Custodian Institutions”, according to M88 game APK Joint Announcement, including M88 game APK China Central Depository & Clearing Co., Ltd. and M88 game APK SHCH).

M88 game APK specific mechanism for registration and custody includes:

(i)M88 game APK Overseas Investors shall open M88 game APK nominee bond accounts and M88 game APK proprietary bond accounts with M88 game APK Offshore Custodian Institution, and M88 game APK Offshore Custodian Institution shall handle M88 game APK bond registration and custody for M88 game APK Overseas Investors;

(ii)any bonds purchased by an Overseas Investor through M88 game APK Northbound Link shall be registered under M88 game APK name of M88 game APK Offshore Custodian Institution, and M88 game APK Overseas Investor shall be entitled to M88 game APK rights and interests of such bonds according to M88 game APK law;

(iii)M88 game APK Offshore Custodian Institution shall open M88 game APK nominee bond accounts with M88 game APK Onshore Custodian Institutions to record M88 game APK balance of all bonds held under such nominee holding structure, and M88 game APK Onshore Custodian Institutions shall handle M88 game APK bond registration and custody for M88 game APK Offshore Custodian Institution; and

(iv)M88 game APK aggregate amount of M88 game APK bonds registered for M88 game APK bondholders having opened M88 game APK bond accounts with M88 game APK Offshore Custodian Institution shall be equal to M88 game APK balance of M88 game APK bonds registered for M88 game APK nominee accounts at M88 game APK Onshore Custodian Institution.

Based on M88 game APK Joint Announcement, we understand that M88 game APK Offshore Custodian Institution mentioned under M88 game APK Draft Measures shall mean M88 game APK CMU, while oM88 game APKr overseas custodian institutions at different levels shall open M88 game APK nominee accounts at M88 game APKir upper-level custodian institutions and ultimately provide M88 game APK information of M88 game APK offshore bond registration to M88 game APK CMU. M88 game APK Draft Measures, instead of giving any furM88 game APKr elaboration, merely require M88 game APK lower-level custodian institutions to level by level and in a timely manner submit M88 game APK data of custody and settlement to M88 game APK upper-level custodian institutions, and to be responsible for M88 game APK auM88 game APKnticity, accuracy and completeness of such data.

To respond to M88 game APK possible concern that M88 game APK overseas investors may have in relation to M88 game APK beneficiary ownership issue under M88 game APK PRC law, we suggest that M88 game APK Draft Measures shall expressly stipulate that a bond beneficiary owner may claim its rights and interests of M88 game APK bonds and M88 game APK relevant rights and obligations shall be subject to M88 game APK terms under M88 game APK relevant contract entered into between M88 game APK beneficiary owner and M88 game APK nominee bondholder.

Trading Procedures

Under M88 game APK Northbound Link, an Overseas Investor shall send M88 game APK trading orders through an offshore electronic trading platform recognized by M88 game APK PBOC, and execute trades with oM88 game APKr investors on an onshore electronic trading platform recognized by M88 game APK PBOC. M88 game APK onshore electronic trading platform shall send M88 game APK execution results to M88 game APK Onshore Custodian Institution for settlement. M88 game APK onshore and offshore electronic trading platforms and M88 game APK Onshore and Offshore Custodian Institutions shall timely, accurately and completely record M88 game APK data of trading, custody and settlement of M88 game APK Overseas Investors, and establish information sharing and communication mechanisms.

Capital Conversion

Any Overseas Investor may invest with any proprietary RMB or foreign currencies. If an Overseas Investor uses foreign currencies to invest, it may conduct M88 game APK currency conversion at a Hong Kong RMB business clearing bank of M88 game APK bondholder and an overseas RMB business participant bank in Hong Kong approved to enter into M88 game APK China Interbank Foreign Exchange Market (“CIFEM”) for trading (collectively, “Hong Kong Settlement Banks”), and after M88 game APK bonds so invested are sold or mature, it shall in principle convert M88 game APK proceeds back into foreign currencies.

It shall be noted that M88 game APK capital conversion under M88 game APK Northbound Link will be administrated as a type of RMB purchase and sale business. M88 game APKrefore, M88 game APK Hong Kong Settlement Banks shall abide by M88 game APK relevant provisions regarding M88 game APK RMB purchase and sale businesses, perform anti-money laundering, auM88 game APKnticity review, information statistics and reporting and oM88 game APKr duties, and properly segregate M88 game APK accounts for M88 game APK proprietary RMB of M88 game APK bondholders and M88 game APK RMB purchased and sold by M88 game APKm.

Foreign Exchange Risk Hedging

In order to hedge foreign exchange risks, an Overseas Investor may, through M88 game APK relevant bondholder, hedge its foreign exchange risks under M88 game APK Northbound Link with a Hong Kong Settlement Bank; for any positions arising from handling M88 game APK businesses of capital conversion, settlement and foreign exchange risk hedging, M88 game APK Hong Kong Settlement Bank may square M88 game APKm in M88 game APK CIFEM, provided that it shall ensure that M88 game APK capital conversion and foreign exchange risk hedging of M88 game APK relevant Overseas Investor at such bank are based on its real and reasonable needs under M88 game APK Northbound Link.

It shall be noted that M88 game APK Draft Measures use M88 game APK term “bondholder” in a few places but does not provide a definition to it. Our interpretation is that, in M88 game APK context of capital conversion and foreign exchange risk hedging stipulated under Articles 10, 11, 12 and 13, M88 game APK “bondholders” M88 game APKrein seems to include any bondholder that may conduct M88 game APK relevant business with a Hong Kong Settlement Bank, in addition to M88 game APK bondholders that open accounts with M88 game APK CMU.

Our Observations

M88 game APK Bond Connect forges a new investment avenue for overseas institutional investors besides direct access to M88 game APK onshore bond market, which is conducive to facilitating convenient investment and reducing trading costs of M88 game APK overseas bond investors. In M88 game APK long run, it will help to stabilize M88 game APK exchange rate of RMB and M88 game APK cross-border capital flow, and furM88 game APKr promote M88 game APK internalization of China’s bond market.