China to roll out Bond Connect programme

17 March 2017   Category: News, Asia, China, Global, Hong Kong   By Asia Asset Management

Market participants are welcoming news that China is looking to launch a fixed income link between the Mainland and Hong Kong this year, a move that is expected to help international investors tap into China’s onshore bond market.

Chinese Premier Li Keqiang announced on Wednesday (March 15) that the pilot scheme of the so-called “Bond Connect” programme is scheduled to go live this year.  

Gregory Suen, investment director, fixed income at HSBC Global Asset Management (HSBC), says in a report that the move underlines the progress Chinese authorities are making in opening up its bond markets to international investors.

According to the HSBC report, China’s bond market is the third largest in the world, estimated at around US$7 trillion. Foreign investors only account for less than 2% of the market, underlining the potential for growth if access is made easier.

Still, Mr. Suen believes that the impact may be smaller than the Shanghai-Hong Kong Stock Connect. He says China’s move last year to open the interbank bond market to foreign investors “was already a very flexible way for institutional investors to access the onshore bond market. So, the Bond Connect may be more suitable for retail investors and investors who want to have a small exposure to the market as a testing first step.”

Vincent Chen, director of business development at China Asset Management (HK), tells Asia Asset Management (AAM) that the Bond Connect programme will be beneficial to sponsors of exchange-traded funds (ETF) as it would provide them greater flexibility to develop onshore bond-ETF products. “Also, the sheer size of [the] Mainland onshore bond market looks very appealing to foreign investors. Its aggregated market turnover for 2016 was almost seven times as that of the A-share market during the same period.”    

Jay Lee, a partner at law firm Simmons & Simmons, Hong Kong, tells AAM that he expects the Bond Connect programme to be helpful in filling the gap between the onshore and offshore markets, which would facilitate cross-border capital flows.

“We expect that the programme will be more helpful for Hong Kong and China fund houses to design more bond products, because up to now, their bond holdings have been quite limited,” he says.  

Although there are platforms such as the QDII (Qualified Domestic Institutional Investor) and QFII (Qualified Foreign Institutional Investor), “the Bond Connect will open up a much bigger universe of bond products to investors in [the] Mainland and Hong Kong, which will, hopefully, enable fund houses on both sides to design new bond products,” Mr. Lee adds.

The announcement of the Bond Connect initiative comes more than two years after Beijing launched the Shanghai-Hong Kong Stock Connect, the first cross-boundary investment channel, in November 2014. Chinese authorities further widened this with the opening of the Shenzhen-Hong Kong Stock Connect in November 2016.