WHITE COLLAR
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Bond Connect needs to be launched as soon as possible

The mainland has already started relaxing its own restrictions on allowing more international investors to trade directly in its bond markets

PUBLISHED : Monday, 06 February, 2017, 12:07pm
UPDATED : Monday, 06 February, 2017, 10:55pm

Hong Kong Exchanges and Clearing (HKEX) is being urged to launch its “Bond Connect” sooner rather than later, as the next major cross-border trading scheme between the city and the mainland.

Beijing has already gradually been opening up its onshore bond markets to international investors.

But the question still remains, would international investors actually be interested in trading through the Bond Connect scheme?

Announced by HKEX chief executive Charles Li Xiaojia last month, Bond Connect would be a major development plan for the exchange in its role as acting as a gateway for international investors to trade in the mainland markets and for mainlanders to invest in Hong Kong. Li, however, has not offered any launch timetable.

We already have two Stock Connects up and running. The Shenzhen-Hong Kong trading link opened in December, allowing investors to buy Shenzhen listed shares via HKEX, while mainlanders can also trade Hong Kong stocks via the Shenzhen Stock Exchange. It’s essentially a carbon copy of HKEX’s connect system with Shanghai Stock Exchange.

Li’s idea now is to expand such cross border trading, to bonds, ETFs, and commodities. The ETF link is almost a done deal and likely to come on stream sometime this year.

Many Hong Kong fund managers have already shown strong interest in the Bond Connect as they would like a slice of the US$8.5 trillion onshore bond market.

They are urging the exchange, however, to act quickly as it appears China already started relaxing its own restrictions on allowing more international investors to trade directly in its bond markets.

The latest move came in December, with the issuance of a 3-year, 3 billion yuan local government bond offered in the Shanghai free-trade-zone and underwritten for the first time by three overseas banks – Standard Chartered, HSBC and DBS.

Bond Connect...may emerge as a preferred channel to trade onshore bonds, if it follows the Stock Connect template. A delayed launch, though, may limit the use of the channel
JP Morgan report

Earlier in the year, Beijing had granted global central banks, sovereign money managers and other offshore long-term institutional investors full access to its interbank bond market.

Ma Jun, chief economist at the People’s Bank of China’s research bureau, in December promised that Beijing would extend trading hours, allow foreign investors to trade derivatives and help them to remit investment returns abroad.

This kind of opening up effectively reduces the need for international investors to trade using any proposed HKEX Bond Connect.

A new JP Morgan report indicates timing is now of the essence for any successful launch in Hong Kong.

“In a recent announcement, one bond index provider is launching new indices incorporating select onshore China bonds,” the report said.

“This takes onshore bonds a step closer to inclusion in benchmarks and opens up the possibility of a sharp pick up in cross-border holdings by foreign institutional investors.

“Bond Connect, if operational ahead of index inclusions, may emerge as a preferred channel to trade onshore bonds, if it follows the Stock Connect template. A delayed launch of Bond Connect, though, may limit the use of the channel.”

HKEX needs to work harder and act quicker to launch its planned Bond Connect, ahead of more opening up of the mainland bond markets.

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