The People’s Bank of China has given the go-ahead to a long-anticipated initiative that will grant foreign investors greater access to the country’s $9 billion bond market via Hong Kong.
The “Bond Connect” scheme will make a major contribution to the opening up of the Chinese capital account by allowing investors in Hong Kong and mainland China to invest in each other’s bond markets.
The plan was first mooted back in 2014, followed the launch of a program to permit bi-directional trading between the Hong Kong and Shanghai bourses.
PBOC has indicated that the Bond Connect scheme will progress in separate phases, with a launch date yet to be announced.
The initial phase will only permit “Northbound” interbank bond market transactions made by foreign and Hong Kong-based investors in mainland Chinese bonds, and will place no cap on transaction volumes.
No timeframe has been given for when Chinese investors would be permitted to make “Southbound” investments in Hong Kong or overseas bonds.
Bond Connect will also abide by the existing framework for foreign investment in China’s interbank bond market, allowing central banks, pension funds and sovereign wealth funds to hawk or procure corporate bonds, Chinese sovereign bonds, local government bonds or policy bank bonds.
The China Foreign Exchange Trade System (CFETS) & National Interbank Funding Centre, China Depository & Clearing and Shanghai Clearing House will serve as the primary fixed income infrastructure providers on the mainland Chinese side, and work in collaboration with Hong Kong Exchanges Clearing (HKEX) and Central Moneymarkets Unit on the Hong Kong side.
CFETS and HKEX would be responsible for establishing an electronic bond trading mechanism for the scheme in conjunction with an international bond trading platform.
While some observers have hailed Bond Connect’s likely positive impact upon Hong Kong’s status as a financial gateway to China, others note that international investors have been able to directly tap into the Chinese interbank bond market since last year, yet have until now displayed little enthusiasm for its debt instruments due to concerns about exchange rate stability and capital outflow restrictions.
Foreign investment currently accounts for just 2% of the onshore Chinese bond market.
According to HKMA executive director Howard Lee, however, the Bond Connect could facilitate outside investment by providing a “new and convenient channel” that will spare outside parties the trouble of having to set up their own dealing accounts in mainland China.