China, Hong Kong launch bond scheme

Links China's $9-trillion bond market with overseas investors to liberalise country's capital market

China and Hong Kong launched a long-awaited ‘Bond Connect’ scheme on Monday that links China’s $9 trillion bond market with overseas investors, the latest step in Beijing’s efforts to liberalise and strengthen the country’s capital markets.
 
The early signs bode well for building an active debt market, with more than two billion yuan ($295 million) of bonds purchased in the first 22 minutes of brisk trade.
 
HSBC Holdings and an asset management unit of Bank of China were among the first to complete trades using the scheme.
 

The launch of the connection was timed to coincide with the 20th anniversary of Hong Kong’s handover to Chinese rule and trading will initially commence ‘northbound’, meaning foreign investors will be able to buy and sell Chinese bonds. No launch date has been set for the southbound channel.

 
“We continue to hold the view that there could be more than $1 trillion of additional global fixed income investments to be allocated to China domestic bonds over the coming decade,” a note from Goldman Sachs said on Monday.
 
In line with broader foreign access rules, overseas investors including pension funds, central banks and sovereign wealth funds will be eligible to trade sovereign and local government bonds, policy bank bonds and corporate debt on the Bond Connect.
 
The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalisation of its currency.

 
“Bond Connect will clearly make it easier for investors to access the Chinese bond market, which in turn makes it easier for investors to hold renminbi,” Andy Seaman, chief investment officer of London-based Stratton Street, said in a note.
 
A giant screen at the launch ceremony showed 2.15 billion yuan worth of bonds were purchased in the first 22 minutes of trade.
 
Chinese regulators formally approved the bond connect scheme in May. International investors have been allowed direct access to the China interbank bond market since last year and some market participants have questioned the need for an additional trading scheme.

 
Overseas investors have been reluctant to enter the market amid fears over the stability of the Chinese yuan, and over potential delays to Beijing’s reforms of the capital markets.
 
China has been keen to increase foreign participation in its bond market, the world’s’ third-largest, where overseas holdings were less than two per cent. This is below the international norm of about 10 per cent, BNP Paribas said.               
 

 

What’s the purpose of the ‘new link’?
 

Why might the new link be more successful?

It helps that it’s not based in mainland China. The programme allows global investors to trade out of Hong Kong without going through most of the approval procedures required on the mainland. It makes use of the well-developed infrastructure in Hong Kong and lets traders complete transactions through settlement accounts.

 
How will it work?

Overseas institutions can bid in the primary market and trade sovereign, local government, central bank, financial institution and corporate bonds, as well as certificates of deposit and asset-backed securities in the secondary market. They can either use yuan they already own or open a specialised account at a yuan settlement or clearing bank in Hong Kong to change currencies.
 
Will the new programme mean more money flowing into China?

While the bond link will likely be the best channel for foreign investors, actual investment decisions are based on the appeal of Chinese bonds. The yield on 10-year government notes is the highest among biggest economies. But the unpredictability of government policies could keep investors away.