Posted inFixed Income

China gives Southbound Bond Connect the go-ahead

Mainland investors will be allowed to trade offshore debt through Hong Kong as a result of the new development in the scheme.

Expansion of the Bond Connect scheme to allow southbound trading will kick off on 24 September, according to a joint announcement issued by the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBoC).

“The launch of southbound trading marks another milestone of mutual access between Hong Kong and mainland capital markets,” said Eddie Yue, chief executive of the HKMA.

“I am confident that southbound trading will deepen the two-way opening up of the mainland financial markets and promote the vibrant development of the Hong Kong bond market, thereby consolidating Hong Kong’s status as an international financial centre,” he added.

In the same announcement, the HKMA and the PBoC have signed a memorandum of understanding and agreed on the principles of cross-boundary supervisory cooperation under southbound trading.

Bond Connect was first approved in 2017, and the northbound leg of the scheme allows more than 2,700 Hong Kong and overseas institutional investors to access Chinese fixed income markets via Hong Kong.

There will be 41 mainland banks, participants in China’s Qualified Domestic Institutional Investor (QDII) and Renminbi QDII schemes, as primary dealers when the scheme launches.

While the northbound route has no quota limit, the southbound equivalent caps the daily outflow from the mainland to RMB20 bn ($3.1 bn) per day, and RMB500 bn per year.

Market participants back the launch

In response to this news, Justin Chan, head of Greater China, global markets, Asia-Pacific at HSBC, said the new link will accelerate the development of primary and secondary bond markets in Hong Kong. 

“Offshore bonds could appeal to onshore mainland investors who wish to diversify their portfolios. As the market grows, more global bond issuers will be attracted to Hong Kong,” he added.

Other market participants are equally positive. “The new rules surrounding southbound trading on Bond Connect are a milestone in the programme’s evolution, which will encourage onshore Chinese investors to become notable participants in Hong Kong in the months and years to come,” said Thomas Fang, head of China global markets at UBS.

According to Alvin Cheng, fixed income portfolio manager at Fidelity International, meanwhile, the launch of southbound trading is beneficial for domestic investors who intend to increase investment in overseas bonds issued by Chinese corporations, especially the Chinese-issued US dollar bonds given their significant differences with domestic corporate bonds in liquidity, risk-return profiles and variety.

The announcement came days after the cross-boundary Wealth Management Connect (WMC) Pilot Scheme was launched, allowing investors in the Greater Bay Area to invest in wealth management products distributed by banks in each other’s market.

Part of the Bonhill Group.