Why China's Bonds Are Opening to Foreign Buyers: QuickTake Q&A
The flags of China and the Hong Kong Special Administrative Region hang in a display ahead of Chinese President Xi Jinping's arrival in Hong Kong, China, on Wednesday, June 28, 2017. Hong Kong is making preparations to mark the 20th anniversary of the former British colony's return to Chinese rule, with July 1 marking the first time Xi will visit the city since taking office.
Photographer: Anthony Kwan/BloombergA bond-trading link between mainland China and Hong Kong opened on July 3, a symbolic date coinciding with the 20th anniversary of the city’s handover. The latest channel into China’s 66 trillion yuan ($9.7 trillion) bond market offers the most efficient access point for foreigners and marks another effort by the nation to open up. While analysts see huge potential for an increase in overseas holdings of Chinese bonds, they caution that the new program doesn’t guarantee a jump in investments, a lesson learned from similar initiatives in cross-border stock trading.
China has the world’s third-largest debt market, behind the U.S. and Japan, but foreign holdings amount to less than 1.5 percent. That’s even after the People’s Bank of China opened interbank trading, which is 90 percent of the market, to most types of investors last year. Offshore traders bought just 101 billion yuan of onshore notes in 2016, a tiny fraction of the total volume. Authorities in Beijing, hungry for more inflows, authorized the bond connect’s opening -- though it’s notable that unlike two existing stock connect systems the new one only goes in one direction, from Hong Kong to the north.