Monday, July 3, 2017

China, Hong Kong Launch Long-Awaited Bond Connect Scheme

By Umesh Desai and Andrew Galbraith
Reuters
July 3, 2017

China and Hong Kong launched a long-awaited "Bond Connect" programme on Monday that links China's $9 trillion bond market with overseas investors, the latest step in Beijing's efforts to liberalise and strengthen the country's capital markets.

HSBC Holdings and an asset management unit of Bank of China said they have completed their first trades using the scheme.

The launch of the connection was timed to coincide with the 20th anniversary of Hong Kong's handover to Chinese rule and trading will initially commence "Northbound", meaning foreign investors will be able to buy and sell Chinese bonds.

"We continue to hold the view that there could be more than $1 trillion of additional global fixed income investments to be allocated to China domestic bonds over the coming decade," a note from Goldman Sachs said on Monday.

The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalisation of its currency.

"Bond Connect will clearly make it easier for investors to access the Chinese bond market, which in turn makes it easier for investors to hold renminbi," Andy Seaman, chief investment officer of London-based Stratton Street, said in a note.

BOCHK Asset Management said it had bought Chinese government and corporate bonds, conducted yuan spot trades related to these deals, and subscribed to a primary bond market issuance by Agricultural Development Bank of China. HSBC said it had completed its first deal as a market maker through the link but did not give additional details.

Media reports said 20 market makers for the bond connect scheme had been approved, including 14 Chinese and six overseas institutions.

BNP Paribas said it had received approval as a market maker and had also executed its first trade under the scheme.

The scheme will also see deals coming through the primary market. China Development Bank said it planned to issue up to 20 billion yuan ($2.95 billion) of one-year, three-year and 10-year fixed-rate bonds for tender on Monday. HSBC said it is one of the underwriters.

China has been keen to increase foreign participation in its bond market, the world's' third-largest, where overseas holdings were less than 2 percent. This is below the international norm of about 10 percent, BNP Paribas said.


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