China's Bond Link Aims to Spur Foreign Inflows Through Hong Kong

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  • PBOC announces ‘bond connect’ after stock link programs
  • Comes after foreigners given greater access to bonds

China’s government increased access to its bond market through Hong Kong, opening another path for foreign investors after the central bank stemmed record capital outflows.

Authorities are seeking to counter outflows and win inclusion in global bond indexes. Foreign holdings of Chinese onshore notes rose to 830 billion yuan ($120 billion) in March, from 815 billion yuan in February, according to central bank data.

The move is the latest step in China’s efforts to open its capital markets and integrate into the global financial system. The bond connect will be the third trading link between mainland markets and the former British colony, after the start of two cross-border systems connecting stock exchanges.

“Bond connect will bring new blood into China’s bond market,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. “Given the high onshore yields, foreign investors may have strong demand if yuan is stable.”

The average yield on China’s AAA rated corporate bonds due in five years has jumped 106 basis points this year to 5.01 percent, around the highest since 2014.

The People’s Bank of China and Hong Kong Monetary Authority said Tuesday that the bond connect system would be one-way at its start, with flows only going northbound from Hong Kong to the mainland. There will be no daily quota, and the regulators didn’t provide a date for when trading would begin.

Authorities in Hong Kong and the mainland will sign a memorandum of understanding to coordinate supervision, the statement said. In a separate statement, the HKMA said the scope of eligible investors would include overseas central banks, sovereign wealth funds, international financial companies, and medium- to long-term institutional investors.

Bond connect will facilitate investors’ participation in the bond markets, improve the connectivity between market infrastructures and promote the healthy development of the bond markets, thereby enhancing Hong Kong’s status as an international financial center and the global offshore renminbi business hub,” Paul Chan, Hong Kong’s financial secretary said in another statement.

Northbound First

The announcement follows the start of two equity channels between Hong Kong’s stock exchange and bourses in Shanghai and Shenzhen. The Shenzhen-Hong Kong link opened in December, two years after the start of the system with Shanghai. More than 1,400 mainland stocks are now available for offshore investors to trade via Hong Kong. Unlike the initial plans for bond connect, the equity programs allow mainland investors southbound access to Hong Kong securities.

“Now that the interbank bond market is already open, it’s much easier to open the northbound first, whereas there are more infrastructure considerations before southbound can be rolled out,” said Sun Binbin, an analyst at Tianfeng Securities Co.

The bond connect is another step in Hong Kong Exchanges & Clearing Ltd. Chief Executive Officer Charles Li’s plan to enhance his firm’s role as a conduit for global investors seeking access to Chinese securities. Li previously said that the program would be followed by further links, including ones for commodities, exchange-traded funds and initial public offerings.

“The HKMA will work closely with PBOC and other relevant parties to finalize the arrangements and roll out bond connect as soon as possible,” said Norman Chan, chief executive of HKMA.

— With assistance by Benjamin Robertson, Judy Chen, Helen Sun, and Gary Gao

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