Can a China-HK Bond Connect Attract Foreign Investors?

Beijing and Hong Kong approved a cross-border bond trading program, called bond connect, hoping to attract a new wave of foreign investors to buy Chinese onshore bonds.
Can a China-HK Bond Connect Attract Foreign Investors?
Two people look towards high-rise buildings in Kowloon, Hong Kong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. Antony Dickson/AFP/Getty Images
Fan Yu
Updated:

Beijing and Hong Kong have approved a new cross-border bond trading program, called bond connect, hoping to attract a new wave of foreign investors to buy Chinese onshore bonds.

The platform is similar in theory but differs in execution to the existing stock connect between Hong Kong and the mainland, which allows foreign investors to purchase mainland stocks. The bond connect will link Hong Kong to Shenzhen’s bond markets and is expected to go live on July 1, the 20th anniversary of Hong Kong’s handover to China.

Beijing hopes the bond connect will legitimize its bond market on the global stage and help diversify bearers of onshore default risk. But immediate success is unlikely, given the existing lukewarm reception of the similar stock connect program and overall investor skepticism of Chinese credit.

Expanding Access

China is the world’s third largest bond market following the United States and Japan, but is largely closed off from foreign investors. It first opened the onshore bond market to foreign investors in February 2016. Under this arrangement, foreign asset managers wishing to purchase such bonds must register locally in mainland China.

The bond connect will officially eliminate that requirement, as firms in Hong Kong will have the ability to purchase onshore bonds at will, without a mainland license.

In a joint statement May 16, the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) said that “Northbound trading will commence first in the initial phase, i.e. overseas investors from Hong Kong and other countries and areas (overseas investors) to invest in the China Interbank Bond Market.” The opposite southbound trading, or mainland investors investing in Hong Kong bonds, will commence in the second phase at a later date.

China is the world's No. 3 bond market (Source: Oppenheimer Funds)
China is the world's No. 3 bond market Source: Oppenheimer Funds
Fan Yu
Fan Yu
Author
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
Related Topics