China gives the nod for investors to buy offshore debt via Hong Kong, opening the southbound leg of Bond Connect

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© SCMP Pan Gongsheng, Deputy Governor of the People’s Bank of China (left) and Norman Chan Tak-Lam, the former chief executive of the Hong Kong Monetary Authority (HKMA) during a seminar on 3 July 2018 to mark the first anniversary of the Bond Connect, at the HKEX Connect Hall in Central. Photo: Sam Tsang

Mainland China’s investors will be allowed to buy and sell offshore debt through Hong Kong in a widening of the Bond Connect transborder investment channel that enhances the city’s role as China’s financial centre.

The so-called southbound leg of Bond Connect will take effect from September 24, according to an announcement by the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank.

The much-anticipated opening, hot on the heels of the September 10 launch of the Wealth Management Connect scheme for cross-border investments in asset management and wealth products in the Greater Bay Area, is the latest financial liberalisation measure to bolster Hong Kong’s role as China’s financial gateway to the world. Today’s iteration widens the scope of the Connect scheme, which provided the first transborder investment channels in 2014 between the capital markets of Shanghai, Shenzhen with the rest of the world via Hong Kong.

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© Provided by South China Morning Post Eddie Yue Wai-man, Chief Executive of the Hong Kong Monetary Authority (HKMA) at the office of the de facto central bank at the IFC in Central on 9 March 2021. Photo: Winson Wong

Under the first Stock Connect in 2014, Chinese investors can buy Hong Kong-traded stocks via the Shanghai Stock Exchange, while global capital can access Shanghai-listed Chinese stocks via Hong Kong. The first link was expanded two years later with a transborder channel linking Shenzhen with Hong Kong.

Since then, more linkages were built, including a little-used channel called the Shanghai-London Connect for European funds to access China’s shares via the UK stock exchange. The first Bond Connect was established in July 2017 for global traders to buy China’s onshore bonds through Hong Kong. As many as 2,733 global institutional investors have been approved to use the northbound link to access China’s US$17.5 trillion bond market, with a daily average turnover of 26.5 billion yuan (US$4.11 billion) in the first eight months of 2021, according to data provided by the Hong Kong Exchanges and Clearing Limited (HKEX).

© Provided by South China Morning Post The Hong Kong Monetary Authority’s deputy chief executive Edmond Lau (centre) at the press conference announcing the Wealth Management Connect scheme in the GBA on 10 September 2021. Other attendees (left to right) are Senior Adviser Donald Chen; Executive Director Darryl Chan; Executive Director Alan Au; and Head of Banking Conduct Florence To. Photo: K. Y. Cheng.

Foreign holdings of yuan-denominated bonds via the northbound Connect surged 35 per cent to 3.78 trillion yuan in August compared with a year ago, as global funds poured into China amid a period of low interest rates in search of higher yields in the country.

As the operator of Asia’s third-largest capital market, HKEX scrapped the trading and settlement fees of fixed-income index funds traded in Hong Kong on May 31 to spur the local bond market, in preparation for the expansion of the Bond Connect scheme.

The latest fees waiver, proposed last year, was the first policy to be executed under the stewardship of Nicolas Aguzin, the former JPMorgan Chase banker who started work on May 24 as the HKEX’s new chief executive. The HKEX main board now has 1,722 debt securities listings, with an average daily turnover at HK$410 million (US$52.7 billion) in the first eight months, 60 per cent more than the same period last year.

Hong Kong was Asia’s hub for arranging international bonds last year, capturing 34 per cent of issuances, or US$196 billion. The United States is in second place at 18 per cent, while the UK is third at 17 per cent and Singapore at 5 per cent, according to HKMA’s Yue.

© Provided by South China Morning Post Nicolas Aguzin, chief executive of Hong Kong Exchanges and Clearing Limited (HKEX), the operator of the world’s third-largest capital market. Photo: HKEX

Southbound Bond Connect is likely to begin by enabling offshore yuan-denominated debt, known as dim sum bonds, according to several market participants.

Increased capital flows will be welcomed by international asset managers, said JPMorgan Asset Management’s portfolio manager Jason Pang.

“The opening of two-way flows is likely to lead to improved liquidity in the dim sum bond market, and widen the arbitrage opportunities across both offshore and onshore markets,” said Pang.

The issuance of dim sum bonds rose to 172 billion yuan in the first seven months of 2021, just shy of the 185 billion yuan record in the same period in 2014, according to research conducted by Standard Chartered. Total outstanding dim sum bonds stood at 607 billion yuan at the end of July.

China’s yuan deposits shrank to US$34.9 trillion in July from a month earlier. With more Chinese investors seeking out dim sum bonds through the southbound Bond Connect, the improved liquidity will encourage more issuers to look at raising funds via issuing the yuan-denominated debt, said Li Bing, head of Asia Pacific at Bloomberg.

“I expect more Chinese onshore companies to look at issuing more dim sum bonds in Hong Kong, as the pool of investors that they are familiar with in Hong Kong expands with the southbound Bond Connect,” said Li.

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