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Trading Link Into China's $10 Trillion Bond Market Set for Fixes

  • Wider use of onshore yuan, clarification of taxes on agenda
  • Foreigner and repo trading among key hurdles, Euroclear says

Hong Kong Exchanges & Clearing Ltd. is planning changes to the gateway to China’s $10 trillion bond market, though one senior industry figure says investors will still want more. 

The bond connect, which allows investors to buy local debt in mainland China via Hong Kong, started in July. The program was modeled on the successful stock connects that link the exchanges in Shanghai and Shenzhen with Hong Kong.

Bond trading is so far only one-way, from the former British colony into the mainland. While trading data for the link isn’t available, total foreign flows into China’s bond market last month were 42.9 billion yuan ($6.8 billion) compared with 38.7 billion yuan in June. China had approved 247 investors to use the system as of Dec. 31, according to the China Foreign Exchange Trade System.

Julien Martin, general manager of Bond Connect Co., a joint venture between HKEX and CFETS that handles connect-related trading services, said in an interview that there are several changes in the works for the system:

  • Real-time delivery-versus-payment, a method for settling bond trades in which buyers pay sellers at the same time that they receive the security. This is a requirement for some types of funds, said Martin, and the change would allow them to use the link
  • Wider use of Chinese onshore yuan (CNY) for settlement as well offshore yuan (CNH)
  • Clarification of how taxes are paid on corporate debt coupons

The planned changes may not be enough to lure investment firms, according to Ivan Nicora, chief executive officer of Euroclear Asia, a unit of Euroclear Bank SA. His clients would like to be able to trade Chinese debt with other foreign institutions without having to use a Chinese counterparty, he said. Investors would also like to use the link to trade repurchase agreements, which would make it easier to hedge local-note holdings, he said.

— With assistance by Judy Chen

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