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How China Is Cracking a Window for Its Bond Investors

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China is taking another step to loosen its capital controls and in the process is giving onshore investors greater access to a previously hard-to-reach bond market. The so-called southbound link of the Bond Connect program will help draw capital from the mainland to bonds available in Hong Kong, which are currently a challenge to buy due to regulatory restrictions. The new channel could serve to check excess strength in China’s currency by balancing money flowing from overseas funds into Chinese assets. It also could help buttress Hong Kong’s status as a financial hub.

Southbound Connect, which opened Sept. 24, offers a way for mainland investors to buy bonds normally targeted at traders outside China. It completes the loop four years after a northbound link gave foreign funds access to China’s interbank bond market via Hong Kong. The People’s Bank of China has set the annual quota for the southbound program at 500 billion yuan ($77.7 billion) and a daily quota of 20 billion yuan, with both to be adjusted based on cross-border fund flows.