Chinese Corporations Leap Aboard Bond Connect

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A slew of Chinese companies are seizing the opportunities provided by the recently launched Bond Connect scheme to obtain funding from global investors.

Bond Connect’s first day of operation saw BNP Paribas, HSBC Holdings and a Bank of China asset management unit all complete trades, with Agricultural Development Bank of China and the China Development Bank slated to soon seal transactions of their own.

China Development Bank will issue fixed-rate bonds with one, three and ten year maturities worth over 20 billion yuan on 4 July. The one-year bonds will also be issued by ABC, BOC and ICBC to Chinese domestic investors, marking the first time that debt has been issued to both foreign and domestic, as well as institutional and retail investors, by means of multiple channels.

Goldman Sachs expects Bond Connect to bring as much as $1 trillion in extra global fixed investments to China’s domestic bond market, while Deutsche Bank, sees inflows of foreign capital reaching $700 – $800 billion over the next five years, as well as the potential inclusion of Yuan-dnominated bonds in global debt indices before the end of the year.

At least several other leading Chinese corporations are expected to soon avail themselves of the scheme to issue bonds to overseas investors, including China Huaneng, China Unicom, China Three Gorges Corporation and Aluminium Corporation of China.

According to Caixin these companies are all central state-owned enterprises are have issued debt overseas in the past, and with whom overseas investors are familiar. As touted by China’s central bank, the Bond Connect scheme will now provide offshore investors with a convenient mechanism to subscribe directly for shares in these firms.

 

Bond Connect differs markedly from the Shanghai Hong Kong Stock Connect and Shenzhen Hong Kong Stock Connect in that it implements a unified, cross-border supervisory system, with foreign investors first registering with the Shanghai office of China’s central bank before obtaining a single transaction account with the China Foreign Exchange Trade System.

Whenever a transaction takes place, unified supervision is achieved by having any custodian institutions promptly submit foreign investor information as well as custodian and settlement data to higher-level custodian institutions for comparison, in order to ensure the identity of the actual investors.

Approximately 110 Bond Connect investors are reported to have registered with PBOC’s Shanghai office, with at least 20 foreign investors opening accounts prior to this.

While foreign investors can only use the accounts for bond transactions, sources close to the central bank say that its scope of usage will be expanded when appropriate in future to encompass repurchase agreements and securities lending.

When it comes to settlement “northbound” investors will be permitted to use an offshore settlement agency bank to exchange currency at onshore rates, which industry observers say will reduce opportunities for arbitrage.

 

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