China will look to add more trading platforms to its Bond Connect with offshore markets and expand the scope of services this year to increase overseas participation in the world’s second-largest bond market, monetary authorities said.
Hong Kong, where the Bond Connect program has its market infrastructure linkage, will continue to play a key role as the gateway in and out of China, especially in the financial realm, they said.
The Bond Connect, which was opened in July 2017, will allow more investors from the mainland and abroad to trade in each other’s bond markets. China plans to reduce the trading fees, extend trading hours and further improve the services in the primary bond market, said Pan Gongsheng, vice-governor of People’s Bank of China, the central bank.
“The Bond Connect has become an embodiment of embracing international market standards and practices, while fully complying with the rules and regulations of the Chinese market. It has also become an important bridge for the opening-up of China’s financial market,” said Pan.
Bond Connect has also been conducive in the inclusion of Chinese bonds into the Bloomberg Barclays Global Aggregate Index and the JPMorgan Government Bond Index-Emerging Markets, which boosted the further opening-up of China’s bond market by the end of June.
China’s bond market has a total value of 108 trillion yuan ($15.35 trillion) now and is the second largest in the world. By the end of June, about 900 foreign institutions from more than 60 countries and regions had accessed the interbank bond market, investing in 2.6 trillion yuan of bonds denominated in Chinese yuan, rising at an average rate of 40 percent per year since 2017, according to data from the central bank.
Foreign investors hold 2.4 percent of all the bonds in China, and their share of Treasury bonds is 9 percent, the official data showed.
This year, supportive domestic credit-easing measures to counter the negative impact of the novel coronavirus pandemic continued to facilitate onshore bond issuance, especially local government bonds.
For the first five months, the local government bond issuance was up 31 percent on a yearly basis. The local government bond issuance totaled 1.06 trillion yuan in the first quarter, a record high, according to data from the Ministry of Finance.
A statement from the PBOC said the steps will further improve the risk-hedge mechanism, bond ratings and taxation policies, and attract more global investors, who have increased need of yuan-denominated assets with China deepening financial opening-up.
Edmond Lau, senior executive director of the Hong Kong Monetary Authority, said: “The Bond Connect is a vivid demonstration of the unique value proposition of HK to the mainland and global investors.”
“To the mainland, HK is a major financial center that can be trusted to pioneer its capital market liberalization program. To the global investors, HK offers a familiar legal and regulatory environment in which they can operate and access the mainland bond market.”
“Chinese mainland’s continued effort to open up means that it will continue to expand existing business and financial schemes as well as roll out new programs in the future where Hong Kong will play the key role as the gateway,” said Tommy Wu, lead economist of Oxford Economics, a British think tank.
“We will see increasing investment from the Chinese mainland and the integration with the Greater Bay Area－the geographic region including Hong Kong, Macao and nine other cities in Guangdong province including Shenzhen, offsetting the uncertainty effect to some extent.”