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Ireland approves China Bond Connect

The Central Bank of Ireland has allowed Irish-domiciled Ucits and AIFs to invest in the Chinese interbank bond market via Bond Connect.

The decision should provide easier access to the Chinese interbank bond market for the €1.8trn ($2.04trn) Ucits and €611 billion AIFs (authorised investment funds) domiciled in Ireland.

“Irish Funds has been working closely with the Central Bank of Ireland to increase ease of access for Irish domiciled funds to the Chinese market and ensure all safe-keeping legal obligations are met by Bond Connect,” said Pat Lardner, CEO of the Irish Funds Industry Association in a statement.

Bond Connect is a scheme that allows investors from mainland China and overseas to trade in each other’s bond markets through connection between the mainland and Hong Kong financial exchanges and supporting infrastructures.

Although the provisions for “southbound” trading are still being examined, “northbound” trading started on  3 July 2017, allowing overseas investors from Hong Kong and other regions to invest in the China interbank bond market (CIBM) through mutual access arrangements in respect of trading, custody and settlement.

Previously, international investors wishing to access China’s $12trn bond market could use the China Interbank Bond Market Direct, or the Qualified Foreign Institutional Investor (QFII) and RQFII routes.

Bond Connect is an alternative, more straightforward route: there is no need to obtain quotas under QFII and RQFII or implement the associated infrastructure and process.

“The [CBI] decision is also timely given the proposed inclusion of bonds traded on CIBM in a number of internationally- recognised indices with the Bloomberg Barclay Global Aggregate Index expected to include CIBM bonds from as early as April 2019 and other indices expected to follow suit,” added Lardner.

“Initially, the new fund flows would likely come from existing funds that are looking for the Chinese exposure as a result of index inclusion or as a tactical positioning in China.  Later on, new funds focusing on the onshore renminbi bond market could be set up given the increasing demand from foreign investors and the flexibility that Bond Connect brings to fund products,” Gregory Suen, fixed income investment director at HSBC Global Asset Management told FSA.

Subject to opening the relevant accounts, Irish regulated funds tracking those indices will be able to access the China bond market via Bond Connect.

As of the end of the third quarter of 2018, 445 overseas investors accessed the CIBM through  through Bond Connect. Holdings by overseas institutions in the CIBM approached Rmb1.7trn ($253bn), an increase of more than 100% from before the launch of Bond Connect, according to a January 2019 report by the Hong Kong Exchange.

However, participation by foreign institutions in China’s bond market is still low when compared with other developed bond markets. Currently, overseas holdings of onshore bonds account for only about 2% overall and about 4% in Chinese treasury bonds, said the report.

However, the CBI decision is “a positive development for the onshore bond market as it provides some fund products easier access to the renminbi bond market.  Overall, it signals the increasing demand for RMB bonds from foreign investors and the importance to include renminbi bonds in a global portfolio,” said HSBC’s Suen.

Part of the Bonhill Group.