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`Bond Connect’ approval opens China’s market further

Following the Stock Connect scheme, Bond Connect aims to become the most convenient channel for foreign institutional investors to enter the Chinese fixed income market, industry sources said.

The cross-border bond trading programme was formally approved by the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) yesterday, according to a joint-statement.

In the first stage, only Hong Kong and overseas institutional investors are allowed to trade bonds without quota restrictions in the China Interbank Bond Market (CIBM). The over-the-counter market accounts for 95% of total bond trading volume in China.

“Northbound trading will follow the current policy framework for overseas participation in the China Interbank Bond Market and at the same time respect international norms and practices,” the statement noted.

The Bond Connect launch date is widely rumored to be 1 July, the 20th anniversary of Hong Kong’s handover to China. The launch date and other trading details, are yet to be announced.

The opposite flow, or southbound trading, “will be explored in due course”, it added.

Some industry sources have cited huge potential for the onshore bond market. China’s bond market is underrepresented on global bond indices and inclusion on key indices would drive signficant capital flows onshore, according to Stratton Street and Standard Chartered, FSA reported earlier.

Wider access

Last year, Chinese regulators relaxed CIBM access by providing unlimited quota to medium-to-long-term foreign institutional investors. Institutional investors can also use the broader quota programmes, the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII), to invest in bonds, but these come with stricter capital repatriation limits.

The Bond Connect is different because it gives investors flexibility and convenience, sources said. For instance, the participant does not need to set up operations onshore, and the account opening can be done in the SAR instead of mainland China.

“The major advantages of the Bond Connect compared to the existing China Interbank Bond Market scheme are the speed of gaining the access and the fewer onshore account set up needed,” said Gregory Suen, investment director of fixed income at HSBC Global Asset Management.

“Given how simple the process appears to be (operational details still need to be confirmed), we expect more new investors would try to get involved in the onshore market because many foreign investors do want onshore bond exposure, but might have been hesitant due to the application and account set up process required by other access routes.”

Angus Hui, Schroders’ Asian fixed income fund manager, speaking at the Hong Kong Investment Funds Association (HKIFA) panel discussion, added that the existing bond access schemes require a lot of commitments and portfolios must invest significantly into China markets.

“The operational procedures required make it very difficult for investors in other parts of the world to test the waters in China,” he explained.

Hui added that scheme should help global asset managers. For example, an emerging markets-focused bond fund registered in New York can utilise the Bond Connect to make some strategic allocation to China, he said.

Already 473 foreign institutional investors have entered the Chinese bond markets for a total investment of RMB 800bn ($116bn), said PBoC in a separate FAQ statement (in Chinese). About 200 of them are from Hong Kong, it noted.

Ge Yin, Shanghai-based head of financial services practice at law firm Clifford Chance LLP, said the Bond Connect is likely to limit investors to those with a medium- to long-term investment horizon.

There are still clarifications to be made on aspects such as trading mechanisms, tax issues, beneficial ownership and custodial arrangements, according to Sally Wong, CEO of HKIFA.

Patrick Pang, head of fixed income and compliance at the Asia Securities Industry & Financial Markets Association (ASIFMA), added: “There’s no mention if there are any repatriation limits, whether it will be a closed-loop system, how trading will be conducted, and whether an omnibus account system will be available for foreign investors. [But] the respect for international norms and practices that is expressed in the joint announcement is very positive.”

The approval of Bond Connect follows the Stock Connect programme that linked the Hong Kong Stock Exchange to the Shanghai and Shenzhen bourses in 2014 and 2016, respectively. 

Part of the Mark Allen Group.