Bond Connect: is the southbound link the game-changing bonanza that banks and investors have been waiting for?

·4-min read

The long-awaited southbound leg of the Bond Connect between mainland China and Hong Kong will encourage more bond offerings in the city, and prove to be a “game changer” that boosts its credentials as a green bonds and dim sum bonds centre, analysts said.

The southbound leg will allow professional investors in mainland China to trade in offshore debt through Hong Kong from next Friday. The northbound Bond Connect, which allows international investors to trade in the mainland bond market, was introduced in 2017.

“The launch of the southbound Bond Connect is going to be a game changer for the Hong Kong bond market. The new scheme will provide new sources of funding and investors for the local bond market, which will attract more mainland Chinese and international governments as well as companies to issue bonds in Hong Kong. Green bonds will have the biggest potential, as many mainland funds and institutional investors are interested in green finance,” said Nelson Chow, chairman of the Hong Kong Investment Funds Association.

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The southbound Bond Connect was given the go-ahead by Beijing this week and is the latest instance of the liberalisation of the mainland capital markets. It is also expected to support Hong Kong as an international financial centre and to boost its relatively weak local bond market, which is worth about HK$2 trillion (US$256.9 billion) – far smaller than the local stock market which is capitalised at HK$46.8 trillion – due to the high cost of bond offerings and fewer local bond investors.

Banks and other professionals will get more business out of offering and trading in bonds as a result of the growing market, said Freddie Chui Ying-wai, the markets and global network leader at Deloitte China.

Hong Kong Monetary Authority officials, including Eddie Yue Wai-man, centre, the de facto central bank’s CEO, during the authority’s press conference in Hong Kong on Tuesday. Photo: Winson Wong
Hong Kong Monetary Authority officials, including Eddie Yue Wai-man, centre, the de facto central bank’s CEO, during the authority’s press conference in Hong Kong on Tuesday. Photo: Winson Wong

Beijing has approved 41 mainland banks and 173 qualified domestic institutional investors (QDII) for trade in all existing bonds in Hong Kong, with a daily quota set at 20 billion yuan (US$3.1 billion) and a yearly limit of 500 billion yuan for the new scheme. In Hong Kong, about 15 banks are expected to be appointed as market markers. The Hong Kong Monetary Authority will have a central clearing unit for Hong Kong dollar and yuan-denominated bonds, or dim sum bonds, initially before expanding to other currencies at a later stage.

HSBC and Bank of China (Hong Kong) (BOCHK), two of the city’s note-issuing banks, are among a first batch of local banks that have declared that they will trade via the new scheme. Sun Yu, vice-chairman and CEO of BOCHK, said his bank was fully prepared for all types of bond products for mainland traders.

“The scheme will promote the growth of the local bond market, deepen domestic and international economic interactions and increase the cross-border use of yuan … and further advancing the internationalisation of yuan,” Sun said.

Mainland investors will be able to trade all bonds issued by Hong Kong and mainland governments, the Hong Kong Mortgage Corporation, MTR and others. They are likely to invest in high-yielding Asian dollar bonds and dim sum bonds issued by non-mainland Chinese issuers, said Andre de Silva, head of global emerging markets rates research at HSBC.

Since the Hong Kong dollar and offshore yuan bond markets were relatively small compared to the US dollar bond market and onshore yuan markets, mainland investors might not be very interested in these products, said Alan Siow, portfolio manager in the fixed-income team at London-based asset management firm Ninety One.

Rather, if the scheme were to expand to cover more US bond products, it would be more attractive to the mainland investors, Siow said. “It would bring a new source of demand to Hong Kong and provide more access to Chinese onshore investors to a category of investments that is harder for them to reach currently,” he said.

“The true winner will be the Chinese onshore investment community, which will now be able to access a broader liquidity pool and trade bond instruments more efficiently,” said James Sun, managing director and head of Asia at Tradeweb, which provides the electronic trading link for the Bond Connect.

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