China's bond market welcomes positive, tax incentives for foreign investment in domestic bonds are extended for another 4 years

  Foreign investment in domestic bonds will then enjoy preferential tax policies.

  On October 27, Premier Li Keqiang of the State Council presided over an executive meeting of the State Council. The meeting pointed out that we must continue to expand opening up, give full play to the advantages of the large domestic market, increase the intensity of attracting foreign capital, and encourage more foreign capital to participate in domestic development through the bond market.

The meeting decided to extend the implementation period of the corporate income tax and value-added tax exemption policy for bond interest income obtained by foreign institutional investors from investing in the domestic bond market to the end of the "14th Five-Year Plan", that is, the end of 2025.

  As early as August 2018, the National Standing Committee proposed that in order to promote a higher level of opening up, encourage and attract foreign capital to participate in domestic economic development, the temporary exemption of corporate income tax and value-added tax on bond interest income obtained by foreign institutions from investing in the domestic bond market , The policy period is tentatively set for 3 years.

  The deputy director of the CITIC Securities Research Institute clearly stated to CBN that this move is mainly to support the opening of the bond market and attract overseas investors to invest in domestic bonds.

Tax exemption makes China's bond market more attractive

  In fact, the tax exemption policy for the interest income of foreign institutions investing in domestic bonds was proposed at the executive meeting of the State Council on August 30, 2018.

  In November of the same year, the Ministry of Finance issued the "Notice on the Corporate Income Tax Value-Added Tax Policies for Foreign Institutions Investing in the Domestic Bond Market" (Caishui [2018] No. 108), clarifying that from November 7, 2018 to November 6, 2021, The temporary exemption of corporate income tax and value-added tax on bond interest income obtained by foreign institutions investing in the domestic bond market.

  In the opinion of industry experts, the extension of the implementation period for the exemption of corporate income tax and value-added tax on bond interest income obtained by foreign institutional investors from investing in the domestic bond market is another "fire" for China's bond market.

  Data show that as of the end of September 2021, foreign institutions held 3.84 trillion yuan in interbank market bonds, accounting for approximately 3.5% of the total interbank bond market custody.

In terms of bond types, the main custody bond of overseas institutions is treasury bonds, with a custody volume of 2.28 trillion yuan, accounting for 59.3%; followed by policy financial bonds, with a custody volume of 1.08 trillion yuan, accounting for 28.0%.

  In addition, in September, 12 new overseas institutional entities entered the inter-bank bond market.

As of the end of September, a total of 991 overseas institutions entered the market, of which 494 entered the market through direct investment channels, 703 entered the market through the “Bond Connect” channel, and 206 entered the market through both channels at the same time.

In September, the spot bond trading volume of foreign institutions in the inter-bank bond market was approximately 930 billion yuan, with an average daily trading volume of approximately 42 billion yuan.

Can hedge the Fed's interest rate hike and other influences

  "As the three-year policy period approaches, this extension will help stabilize foreign investment expectations and increase the attractiveness of foreign investment." A macro researcher from the Financial Markets Department of a joint-stock bank told reporters that the extension of the tax exemption period is eliminating the policy for foreign investors. At the same time of doubt, it also gives foreign capital more incentive to allocate China's bond market.

  Obviously, tax exemption for foreign investment in domestic bonds does not necessarily inspire overseas investors' enthusiasm for purchasing corporate bonds.

This is because overseas investors still need a process to invest in Chinese corporate bonds, which involve multiple factors such as domestic and foreign rating systems, infrastructure, and investment philosophy.

  However, most market analysts believe that, from the perspective of foreign holdings of China’s bonds, the attractiveness of China’s bonds to foreign capital will continue to increase.

  Obviously, from the perspective of China-US interest rate differentials, this move can increase the attractiveness of Chinese bonds and, to a certain extent, can hedge the impact of the Fed's interest rate hike and the upward trend of U.S. debt.

  The macro researcher of the financial market department of the above-mentioned joint-stock bank believes that China's monetary policy has returned to normal, and the Fed is currently in the early stage of policy normalization. Although the Fed is expected to start reducing the scale of bond purchases within this year, the Fed's distance policy is based on the current situation of epidemic prevention and resource idleness in the United States. There is still a long way to go to normal levels, and China and the United States will maintain wide spreads for a long period of time.

  The "China Balance of Payments Report for the First Half of 2021" pointed out that under the background of China's economic recovery, the continuous opening of the bond market, the good return of RMB assets, and the gradual enhancement of risk-averse properties, China's bonds are favored by foreign investors.

In October of this year, China’s national debt will be officially included in the FTSE Russell World Bond Treasury Index. So far, RMB bonds have been included in mainstream international securities indexes. It is expected that the attractiveness of RMB assets will increase steadily in the future.

  The researcher of the above-mentioned joint-stock bank stated that in the future, China will steadily promote the high-level opening up of the financial industry and the internationalization of the RMB, enrich financial products, improve the cross-border investment infrastructure, and continuously improve the level of investment facilitation for global investors. RMB assets will attract foreign investment. Inflow.

(Author: Du Chuan)

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