China’s $9t Bond Market Open to Foreign Investors

The long awaited cross-border trading scheme, which initially will give international investors access to China’s $9 trillion bond market via Hong Kong Exchanges and Clearing, marked a milestone in China’s further opening up of its capital account. It also marked a milestone for HKEX in expanding its products from stocks and commodities to bonds.

Newly appointed Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor hosted the Bond Connect debut ceremony at the exchange on Monday, just three days after she took office, news outlets reported.

“Bond Connect marks another new chapter of mutual market access between Hong Kong and the mainland,” Lam said. “It is an important milestone for the internationalization of renminbi as it makes it easy for international investors to trade bonds in China.

“The new Bond Connect and the two stock connects enhance cross-border trading between Hong Kong and the mainland. This strengthens Hong Kong’s role as international financial center.” The next step, she said, is to work on the launch of southbound trading to allow mainlanders to buy and sell bonds in Hong Kong.

People’s Bank of China deputy governor Pan Gongsheng said the Bond Connect “shows the central government’s support for the Hong Kong market.” But southbound trading through Bond Connect would launch only when there is sufficient demand, he added.

The first day’s trading saw 89 financial firms conduct 142 transactions worth 7.048 billion yuan. The majority were buying orders, including 128 transactions worth 4.9 billion yuan. The investors were mainly government agencies and banks including Hong Kong Monetary Authority, ICBC, HSBC, Standard Chartered Bank, BNP Paribas, among others.

BOCHK Asset Management, a wholly-owned subsidiary of Bank of China (Hong Kong) Holdings, claimed it was the first institution to trade under the scheme. The company said in a statement it had successfully completed the first buy order on a Chinese government bond, the first on a corporate bond and the first yuan spot trade. It also subscribed to the first primary bond issuance under the Bond Connect, by Agricultural Development Bank of China, according to the statement.

China's $9 trillion bond market is the third-largest in the world, but only 2% of Chinese bonds are foreign-owned.

The launch has been timed to coincide with the 20th anniversary of Hong Kong's handover to Chinese rule.

Rating Credibility

Buying Chinese bonds—essentially Chinese government and corporate debt—will give investors greater access to investments denominated in the Chinese currency, the yuan or renminbi, BBC reported.

Overseas investors have in the past been cautious about entering the market—partly over the stability of the Chinese currency as well as Beijing's perceived lack of urgency to reform its financial markets. There has also been long-held concern about the credibility of credit ratings for bonds in China. Similar systems to enable dealing in Chinese shares have been rolled out recently.

Since late last year, foreign investors in Hong Kong have been able to trade shares in about 900 firms in companies on the Shenzhen Stock Exchange and vice-versa following the official launch of the Shenzhen-Hong Kong trading link.

That link followed the launch of the Shanghai-Hong Kong Stock Connect in November 2014, which allowed international investors to trade in hundreds of Shanghai-listed A-shares as well as Hong Kong stocks.

Last month, US stock index provider MSCI agreed to include China's mainland domestic shares in its emerging markets index for the first time.

Strengthening HK Market

HKEX chairman Chow Chung Kong said the scheme will be a significant channel for international investors to trade mainland bonds.

“The bond connect, like the two stock connects with Shanghai and Shenzhen and HKEX, strengthens the role of the Hong Kong market as a gateway for international investors to access the mainland market,” Chow said.

“Bond Connect will be a catalyst for the continuing development and globalization of China’s bond market, as well as reinforcing Hong Kong’s position as a leading international financial center,” said Peter Wong, chief executive of HSBC Asia Pacific.

“The convenient access provided by Bond Connect will allow global investors to trade Chinese bonds more efficiently, potentially increasing their participation in the world’s third biggest bond market.”

Wong said this new demand for Chinese fixed income products should also encourage more overseas issuers to tap the Panda bond market, which was especially relevant for markets along the route of the Belt and Road Initiative. The mega-project proposed by Beijing involves working with 65 neighboring countries to build roads, railways and other infrastructure to promote trade.