Recently, the State Administration of Foreign Exchange (“SAFE”) issued a circular concerning the foreign exchange risk management of foreign institutional investors in the interbank bond market in order to convenient the foreign investors to control risk and to promote the opening of the bond market and foreign exchange market.
The new policies and regulations in this Circular allow the foreign investors, including commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions lawfully registered and incorporated outside the People’s Republic of China, as well as investment products lawfully launched by such financial institutions and other long- and medium-term institutional investors recognized by the People’s Bank of China (“PBOC”), to handle the foreign exchange derivatives business, containing forwards, foreign exchange swaps, currency swaps and options, through settlement agents qualified and approved by the SAFE in the interbank market. However, taking into account that the foreign investors involved in the domestic foreign exchange market is mainly used to hedge the foreign exchange risk exposure incurred by remitting funds from overseas for investment in the interbank bond market and currently is not the main provider of market liquidity, so their foreign exchange transactions shall be limited within the retail market, i.e. the bank counter market and shall follow the principle of actual transaction needs.
The SAFE further stated that it would continue to deepen the development of the foreign exchange market in the future, enrich the trading instruments, broaden the participation of the participants, expand the opening to the outside world, improve the infrastructure and better meet the needs of foreign institutional investors, including inter-bank bond market players on managing and controlling risks over foreign exchange, service entity economic development and support the opening of financial market.