China-Hong Kong Launch ‘Bond Connect’ Scheme

The landmark ‘Bond Connect’ scheme that links up China’s bond market with overseas investors was launched on July 3 by China and Hong Kong. Under this scheme, foreign investors will be able to participate in the $9 trillion market without having to set up onshore accounts. International investors currently own barely 2 percent of the market which is the world’s third largest.

The launch follows the introduction of similar trading links between Hong Kong and Shanghai in 2014 and between Hong Kong and Shenzhen in 2015. Beijing has been rolling out several measures in recent years seeking to internationalize its currency.

The introduction of ‘Bond Connect‘ makes it easier to access the country’s debt market and eliminates worries of capital flight. However some analysts have expressed concerns of depreciation in the yuan value, as well as the reliability of local credit rating agencies.

The launch saw brisk trade with global investors making bond purchases worth 4.9 billion yuan ($721.4 million). Industry observers have however warned against going by trading numbers of the first day. Total trading volume on the first day according to the China Foreign Exchange Trade System was 7.05 billion yuan.

The launch was timed to coincide with the 20th anniversary of Hong Kong’s handover to China by the United Kingdom (UK). In the initial phase, investors will be getting access to northbound channel that uses Hong Kong-based financial institutions to access mainland China’s interbank bond market. The southbound route has no date set for launch. Hong Kong Exchanges and Clearing Ltd (HKEx) chief executive Charles Li noted that demand for the channel was poor.

This enhanced market access is likely to heighten the amount of yuan-denominated assets held by global investors. According to Goldman Sachs, nearly $1 trillion of fixed instrument investments made globally will be towards the Chinese debt market in the next decade. Some observers however feel that Bond Connect could impact the internationalization efforts of the yuan.

In a statement Chi Lo, senior economist at BNP Paribas Asset Management said

A successful Bond Connect operation will actually be counterproductive to renminbi internationalization in the short-term. This is because it will lead to more renminbi flowing back to China and, thus, further erode the CNH pool.

According to local media reports, around 20 market makers have received approval for participating in the Bond Connect scheme, with 14 of them being Chinese firms and the remaining six being overseas institutions. The international firms approved so far include BNP Paribas, Citigroup and Standard Chartered.

Charlie Harrison

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