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May 17, 2017

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Scheme bonds mainland and HK markets

CHINA yesterday announced the approval of a bond connect program between the mainland and Hong Kong markets, another key step in the opening-up of the country’s capital markets.

Plans for the bond connect program have been in the works since Beijing launched a scheme allowing two-way trading between the Hong Kong and Shanghai stock markets in 2014, but the authorities have provided few details on the mechanics or the timeline.

The new program will “reinforce and improve Hong Kong’s role as an international financial center, help China’s financial opening-up and contribute to Hong Kong’s long-term prosperity and stability,” said a joint statement from the People’s Bank of China and the Hong Kong Monetary Authority, which regulates the city’s bond market.

China Foreign Exchange Trade System, China Central Depository & Clearing and Shanghai Clearing House have been approved as the mainland’s main fixed-income infrastructure providers for the scheme.

They will collaborate with the Hong Kong Exchanges & Clearing (HKEx) and Central Moneymarkets Unit in establishing mutual bond market access between the mainland and Hong Kong.

Trading will initially commence “northbound” only in the interbank bond market, meaning just foreign and Hong Kong investors will be able to trade Chinese mainland bonds at first. There will be no quota for such investments, they said.

The authorities said the scheme would be launched in phases and did not indicate when mainland investors would be able to trade Hong Kong and overseas bonds, also known as “southbound” trading. The scheme’s launch date will be announced later, they added.

Benjamin Hung, CEO for China and North Asia at Standard Chartered, said the bond connect would boost Hong Kong’s role as a gateway between foreign investors and the Chinese market.

“It will provide a new channel for Hong Kong and international investors to invest in Chinese mainland bond market, which is ... much undersold to global investors at the moment,” he said.

International investors have direct access to the mainland interbank bond market since last year, and some market participants have questioned if there is a need for an additional bond connect scheme.

Foreigners have to date invested around 800 billion yuan (US$116 billion), or just 2 percent, in the onshore Chinese bond market, which is the third-largest globally with an outstanding amount of about 66 trillion yuan (US$9.6 trillion) at the end of March.

Howard Lee, HKMA’s executive director, said the bond connect will offer investors a “new and convenient channel” with fewer technical hurdles than accessing the interbank bond market directly. This is because investors would be able to buy Chinese bonds via their existing dealers in Hong Kong without having to go through the hassle of setting up dealing accounts on the mainland, he said.

“I’m not saying there won’t be procedures here, but the legal documents, the vetting etcetera, all these will be streamlined,” Lee said, later adding that the bond connect would also be more transparent than the current access channel.

The regulators said the bond connect will follow the current framework for overseas participation in the mainland interbank bond market, meaning a range of foreign investors including pension funds, central banks and sovereign wealth funds would be eligible to trade Chinese government bonds, local government bonds, policy bank bonds and corporate debt instruments.

The regulators said China Foreign Exchange Trade System and HKEx will work with an international bond trading platform for electronic bond trading between overseas investors and mainland dealers.

Links of stock trading between Hong Kong, Shanghai and Shenzhen were launched in 2014 and 2016, respectively, significant steps of the internationalization of China’s financial market.


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