Trading infrastructure for China-Hong Kong Bond Connect can be in place in six months, says ASIFMA

Clearing mechanism for China-Hong Kong bond link needs sorting out

PUBLISHED : Friday, 16 October, 2015, 1:41pm
UPDATED : Friday, 16 October, 2015, 7:19pm

Discussions for a China-Hong Kong Bond Connect scheme have resurfaced, even taking priority over the Shenzhen-Hong Kong Stock Scheme as global regulators descended on Hong Kong to discuss cross-border policy measures and macro-prudential risks over the past week. 

Hong Kong Exchanges and Clearing has been inundated with questions regarding the bond programme’s progress. The official line, from Tae Seok Yoo, head of client business development for global markets at HKEx, is that there is “no further update at this stage”. However, sources familiar with the matter said progress towards establishing the scheme is already well underway.

In particular, the trading infrastructure under the Bond Connect scheme could be in place as soon as six months, though it might take up to two years, according an official at the Asia Securities Industry & Financial Association (ASIFMA). “We have made a presentation to the People’s Bank of China (PBOC), the National Association of Financial Market Institutional Investors and other relevant regulators. It was very well received,” said Vijay Chander,  executive director for fixed income at ASIFMA.

Chander believes the existing trading mechanism for the Shanghai-Hong Kong Stock Connect scheme connecting the Hong Kong and Shanghai bourses is ready to be expanded to give international investors access to China’s onshore bond market.

“You just need a clearing mechanism that could be connected to CFETS,” he said.

CFETS, the China Foreign Exchange Trade System, is a platform run by the PBOC that provides trading for bonds, derivatives and currencies. It is the leading provider for bond clearing, data, risk management and surveillance services.

“Pages and pages of documents are being translated on the proposal. It’s a lot of work,” said a source with direct knowledge of the matter. The infrastructure issue will need to be worked out on the Hong Kong side before the connection to China could happen. Hong Kong’s work is currently focused on enhancing HKEx’s clearing platform, OTC Clear.

“The main issue is the link between the Hong Kong Monetary Authority’s Central Moneymakers Unit with the HKEx’s OTC Clear. The discussions with CFETS is pending,” the source said.  

Charles Li Xiaojia, HKEx’s chief executive, has publicly championed the Connect scheme into other asset classes.

Under the initial phase of the scheme, Chander said access to both the China interbank bond market and the exchange market was possible. Chinese government bonds, policy bank bonds, financial bonds and corporate bonds would be among the initial focus of permissible products.

In return, under the two-way structure of the scheme, China’s onshore investors could potentially gain access to offshore China bonds denominated in G3 currencies, including the US dollar, euro and Japanese yen.

The scheme is a means for China to gain international funding and improve pricing in the fixed income market, Chander added.

According to the Bank of China, 92 per cent of mainland bonds are traded on the interbank market. About 5 per cent of the market is traded on the Shanghai and Shenzhen stock exchanges, with the  remainder  traded over-the-counter.

 BOC said total foreign ownership stands at just 2.5 per cent.

The Bond Connect programme will be a further step to expand foreign investors’ access into the fixed income market of China.

Goldman Sachs valued China’s bond market at 35.89 trillion yuan (HK$43.7 trillion) at the end of June, making it the world’s third largest after the US and Japan.

In September, the PBOC also liberalised the access that foreign central banks and official institutions have to the interbank bond market.