China Opening $8.4 Trillion Bond Market Challenges Hong Kong

  • HKEx bond link one of many ways to access China, says Haitong
  • Hong Kong bourse offering new products to improve revenue

Hong Kong Exchanges & Clearing Ltd. is facing a challenge to its plans to allow customers to trade in the Chinese bond market as the country’s central bank offers access to international investors.

While HKEx is talking to Chinese authorities about an electronic trading link to the nation’s interbank bond market, the People’s Bank of China and State Administration of Foreign Exchange last month published rules allowing foreign investors to buy those securities, part of a broader effort to open up to direct overseas investment. HKEx will also be in competition with Germany’s Deutsche Boerse AG in offering access, a departure from the dominance it enjoys in the equities market.

“The bond market is all new for them, but they are not going to have a monopoly,” said Tony Tanaka, a Tokyo-based analyst at Haitong International Securities Group. “What it can do is to help connect bond markets between mainland and overseas, but a pure connection role has limited potential” for HKEx’s revenue.

Expanding in the fixed-income market is part of the exchange operator’s plans to broaden its products and increase projects with China. The company, which has seen its share price fall 35 percent in the past year, is looking for ways to prop up revenue, which is projected to decline this year for the first time since 2012. Though it faces challenges, HKEx is optimistic about the potential in tapping a relatively new asset class, according to Julien Martin, head of fixed income and currency product development.

“We are aware that the amount of bonds we have right now in the exchange is not a good enough value proposition,” Martin said in an interview at the company’s headquarters. “The interest is actually to have Hong Kong become a much more relevant fixed income and currency center then it is at this moment.”

For a guide to the challenges the Hong Kong exchange is facing, click here.

The Hong Kong bond market was about $795 billion at the end of the first quarter, according to Asia Securities Industry & Financial Markets Association data. China’s bond market is $8.4 trillion, data compiled by Bloomberg show. The bond connect could boost high-yield issuance in Hong Kong and lure Chinese private firms unqualified to sell domestic notes to the city, Martin said. He didn’t provide a start date, saying the bourse is still in talks with the authorities.

China has said it will remove quotas for most financial institutions to invest in the interbank bond market in February, after announcing earlier that fund managers approved under its Qualified Foreign Institutional Investor program won’t need to apply for allocations.

A Hong Kong bond trading link will also face competition from Deutsche Boerse. That exchange’s Clearstream unit plans to link to China’s interbank bond market, people familiar with the plan said in April.

Martin said the city has advantages that puts it ahead of its challengers.

“We have one foot in, one foot outside China," Martin said. "We’ve got a legal system, we’ve got rule of law. I’m convinced the mainland market will eventually be essential and the Hong Kong market can develop on the back of that.”

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