Hong Kong, China regulators approve Bond Connect scheme

A Hong Kong Exchanges flag (left) is hoisted beside a Chinese national flag outside the Hong Kong Stock Exchange in Hong Kong on June 7, 2016.
A Hong Kong Exchanges flag (left) is hoisted beside a Chinese national flag outside the Hong Kong Stock Exchange in Hong Kong on June 7, 2016. PHOTO: REUTERS

HONG KONG (REUTERS) - Hong Kong and Chinese regulators said on Tuesday they had formally approved a long-awaited scheme to connect China's US$9 trillion (S$12.6 trillion) bond market with overseas investors, another key step in the opening up of China's capital markets.

Plans for a Bond Connect programme 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 Hong Kong Monetary Authority, which regulates Hong Kong's bond market, and the People's Bank of China said they had formally approved the China Foreign Exchange Trade System (CFETS) & National Interbank Funding Centre, China Central Depository & Clearing and Shanghai Clearing House as the main Chinese fixed income infrastructure providers for the scheme.

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

Trading will initially commence "Northbound" only in the interbank bond market, meaning just foreign and Hong Kong investors will be able to trade Chinese 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 Chinese 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 Greater China & 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 mainland China's bond market, which is ... much undersold to global investors at the moment," he said.

International investors have been allowed direct access to the China interbank bond market since last year and some market participants have questioned whether there is a need for an additional "Bond Connect" scheme. Overseas investors have so far proved reluctant to enter the onshore bond market amid fears over capital outflow curbs and the stability of the Chinese yuan.

Foreigners have to date invested around 800 billion yuan (S$162.4 billion), or just 2 per cent, in the onshore Chinese bond market, which is the third largest globally.

HKMA executive director Howard Lee said that "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 through 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," Mr Lee told reporters, later adding Bond Connect would also be more transparent than the current access channel.

The regulators said Bond Connect will follow the current framework for overseas participation in the China 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 CFETS and HKEX will work with an international bond trading platform to provide electronic bond trading between foreign investors and mainland dealers, but did not provide further details.