China has taken measures to expand eligibility and volumes on the Southbound Bond Connect programme as it seeks to open up its bond market, giving non-bank financial institutions access to the market for the first time.
Bond Connect has allowed overseas investors to trade in the Mainland China bond market through Hong Kong since 2017. A Southbound connection, facilitating access to global bond markets for Mainland investors, was introduced in 2021.
Onshore securities firms, fund managers, insurers and wealth management institutions will now be able to use Bond Connect.
In a keynote speech at the Bond Connect Anniversary Summit, Hong Kong Monetary Authority (HKMA) chief executive Eddie Yu commented, “This will open up more channels to meet the growing demand from mainland investors, addressing their needs for diversified asset allocation.”
Yu cited rapid wealth accumulation in mainland China, particularly in institutional capital, as a driving factor for the expansion.
“[This] is creating new opportunities for their outbound investment. As mainland institutional investors increasingly seek to diversify their portfolios and expand overseas asset allocation, there is significant potential for future growth in the Southbound Bond Connect.”
For international investors, he added, “China’s bond market [is an] attractive asset class for global investors seeking high-quality investments. In fact, according to a recent survey on central banks, over 30% of the respondents expect to increase their RMB holdings in the next five years.”
Beyond the expansion of eligible investors, Bond Connect is also further developing its offshore repo structure. The scenarios in which onshore RMB bond investment can be used as collateral for offshore repo will be expanded, allowing USD, EUR and HKD to be used as tradable currencies.
The firm has also stated its intentions to simplify the bond opening account process and broaden access to the repo market, removing the freeze on pledged bonds in repo transactions in partnership with CMU OmniClear – Hong Kong’s central securities depositary for debt securities. This will bring the market in line with international practices, it said.
Commenting on the expansion, Andrew Beacham, global head of emerging markets product at Bloomberg, told The DESK, “Enhancing offshore repo arrangements marks a major step in boosting liquidity and reinforcing Hong Kong’s role as a global RMB hub, aligning with international best practices and offering investors greater flexibility.”
This marks a continuation of Bond Connect’s efforts to open up its repo market to international investors. Earlier this year, a partnership with Bloomberg allowed foreign investors to use Northbound Stock Connect bonds as collateral in repo transactions and to negotiate repo rates.
READ MORE: China opens up repo market with Bloomberg partnership
In the third part of expansions announced at the anniversary event, Bond Connect stated that it is building out its interest rate risk management capabilities in response to investor demand. This initiative includes the introduction of a dealer management mechanism and an adjusted daily net trading limit.
Julia Leung, CEO of the Securities and Futures Commission of Hong Kong (SFC) commented, “The SFC will adopt a three-pronged approach to expand and diversify the offshore RMB product ecosystem, enhance offshore RMB liquidity, and establish robust and reliable infrastructure. These will be our top three priorities this year.”
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