China-Hong Kong Open Bond Market To Overseas Investors

Hong Kong and Chinese regulators recently gave their approval for overseas investors to invest into China's massive bond market which is valued at $9 trillion. This long anticipated move will provide investors further access to China’s economy, which is a part of the government’s plan to integrate the country more with global markets.

Called ‘Bond Connect’ the program will allow cross-border trading for investors and is similar to the scheme launched in 2014 that connected Shanghai and Hong Kong stock markets. Currently foreign investors can buy Chinese debt via separate channels but hold a mere 2 percent of total onshore bonds, indicating concerns of the yuan’s stability and capital controls.

China’s central bank, the People's Bank of China (PBOC) and regulator Hong Kong Monetary Authority (HKMA) made the announcement earlier this week but gave no launch date and also no details of how the program will be run. Their statement highlighted that the infrastructure providers for Bond Connect would be the China Foreign Exchange Trade System (CFETS), China Central Depository & Clearing, Shanghai Clearing House and National Interbank Funding Centre.

These agencies will work with the Hong Kong Exchanges and Clearing (HKEX) as well as the Central Moneymarkets Unit to set up access to respective bond markets. The authorities highlighted that the program would be rolled out in phases.

Initially under the scheme, overseas investors and those from Hong Kong would be allowed to trade on China's interbank bond market, which has been called as the northbound trading link. The regulators said that the southbound link which involves mainland Chinese investors would be explored later. There are expected to be no quotas on investment levels according to authorities. Analysts are hopeful that the new channel will heighten interest in China’s bond market.

In a statement Benjamin Hung, chief executive for Greater China & North Asia at Standard Chartered said

It will provide a new channel for Hong Kong and international investors to invest in mainland China's bond market, which is the third-largest in the world and much undersold to global investors at the moment

HKMA executive director Howard Lee noted that Bond Connect will introduce a new and easy channel to access the interbank bond market directly. Interested investors can now buy Chinese bonds through dealers located in Hong Kong, without having to set up trading accounts on the mainland.

Analysts from investment firm Goldman Sachs said that Bond Connect is likely to take off when Chinese bonds become a part of the benchmark fixed-income indexes.

Charlie Harrison

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