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China debt-buying via Bond Connect has strong July

The launch of Bond Connect contributed to the biggest jump in foreign ownership of Chinese debt in ten months, according to July data from China Central Depository & Clearing (CCDC).


The total value of Chinese sovereign bonds owned by foreign investors rose by 8.4% to RMB486.77bn ($70.6bn) in July, according to data from CCDC, the clearing house of onshore bonds. CCDC attributes the growth partly to the launch of the Hong Kong-China Bond Connect on 3 July.

The share of foreign holdings in China debt increased by 0.26 percentage points, to 4.26% in July, the largest increase since September 2016.

The Bond Connect scheme gives international investors direct, “northbound”, access to China’s onshore bond market. The “southbound” access enabling mainland investors to trade overseas bonds is planned in the future.

Investors using Bond Connect are not limited by quota or obligated to declare an intended amount of investment, unlike the three existing schemes: the Qualified Foreign Institutional Investor (QFII), its renminbi version (RQFII), and the China Interbank Bond Market (CIBM).

Slow adoption

The first trading day of Bond Connect saw RMB7.05bn of transactions, which included 128 buy orders for RMB4.9bn, reflecting pent-up demand from foreign asset managers. 

This level of activity, however, did not last. “Except the glamorous first day, the programme seemed to have a slow start,” said Hao Hong, head of research and strategy at BOCOM International Securities.

CIFM Asset Management in Hong Kong, a subsidiary of China International Fund Management, has yet to use Bond Connect.

“Right now, we are using RQFII to allocate our position in the onshore market and I don’t see a need for another channel in the near future,” said William Chung, senior fund manager at the firm. He added that he expected the quota limitation of RQFII would be eliminated eventually, making the two channels identical for the firm’s purposes.

The demand for Chinese bonds is closely linked to the value of China’s currency. After falling 6% last year, the renminbi rebounded by around 4% so far in 2017.

“The expectation of US dollar appreciation is still strong now, leading to the demand for renminbi bonds to remain weak,” said Chung.

BOCOM’s Hong added: “If the yuan remains steady, the demand for onshore bonds will definitely increase. However, while the inflation expectation is still strong in China, international investors tend to wait a bit longer.” 

Part of the Mark Allen Group.