Analysis | Four reasons China is opening its bond market to the world
Foreign investors are likely to eventually account for 11 per cent of assets within China’s debt markets over time, implying US$1.5 trillion in capital inflows in coming years
This past Wednesday, the People’s Bank of China and the Hong Kong Monetary Authority announced a joint cooperation to launch “Bond Connect”, with no exact timing given.
Bond Connect is the formalisation of allowing two-way bond investment, trading, custody, and settlement.
The announcement says that the “Northbound Connect” will launch first (with no investment quota), with “Southbound Connect” to follow in due course.
While long flagged by authorities on both sides, this announcement is significant in that currently only 1.5 per cent of the Chinese bond market is held by foreigners, as against a probable benchmark of about 11 per cent. We are not suggesting this reweighting will happen quickly, but rather that the Bond Connect is another step toward developing the necessary infrastructure.
The announcement is a reflection of the continued development and opening of China’s bond market, which is following a progressive path. This includes rapid issuance in domestic bonds (attained); inclusion of Chinese bonds in global indices (occurring); establishing Bond Connect (in process); and institutionalising the bond market, including developing internationally-acceptable credit ratings, credit enhancement, and credit insurance (early stages).
