China's ambitions to open bond market seen as tough sell
Goal to extend stock through train to bond market complicated by lack of centralised platform and worries over capital controls and fund flows
Beijing’s ambition to connect its massive bond market with the rest of the world could prove tougher than linking the stock markets of Hong Kong and Shanghai.
The South China Morning Post reported on February 9 that China is studying linking the nation’s bond market with Hong Kong, giving foreign investors access to the world’s third-largest debt market valued at 30.7 trillion yuan (HK$38.6 trillion) as of January.
Unlike equities which are traded in centralised platforms, bonds on the mainland and in Hong Kong are mostly dealt over the counter, which would leave regulators with a much tougher job of monitoring fund flows and calculating taxes.
Fungible markets on both sides, where each deal is struck based on bid and ask prices negotiated between two trading counterparties, could make monitoring extremely difficult.
“The key concerns are capital controls and how to monitor the cross-border fund flow,” said Arthur Lau, the head of Asia, excluding Japan, fixed income and co-portfolio manager for emerging markets at PineBridge. “At the moment, it is difficult to remove money from onshore to offshore due to tax or administrative reasons. And trading in the onshore bond market may involve capital gains. Keeping track of these tax issues and fund flows will be a big challenge even for the trading side.”
The mainland bond market is being traded on three platforms.