The People’s Bank of China’s new law governing the launch of the Hong Kong Bond Connect scheme has removed a key provision that restricted the amount of “northbound” investment allowed.
The “Mainland and Hong Kong Bond Connect Cooperative Interim Measures” were released on 21 June by PBOC, containing significant changes compared to the “draft for opinions” version which was released on 31 May.
Chief amongst them is the removal of passages concerning restrictions on the amount of northbound investment in mainland Chinese debt via Hong Kong, and the absence of any replacement provisions.
Analysts say that the move isn’t not necessarily a sign that the Chinese central bank will lift all restrictions, but could be intended to give regulators greater flexibility when it comes to the immense challenge of connecting the trading systems of the two jurisdictions.
While the whole purpose of Hong Kong Bond Connect is to draw a greater volume of capital into China’s debt market and abet internationalisation of the Renminbi, the central bank may be concerned that a sudden influx of funds could jam or overwhelm the domestic system.
Speaking to Caixin Standard Chartered’s chief China economist Ding Shuang said that amounts restrictions could impact the decisions of investors, especially those who engage in short-term trading that would involve large volumes of funds shifting back and forth in equal measure.
The scheme is expected to advance the internationalisation of the RMB, with the interim measures clearly stating that investors will in principle be allowed to remit overseas any foreign exchange used for domestic bond investment, by means of Hong Kong-based clearing banks.