Mainland-Hong Kong bond connect is just the first step, says forex chief

Pan Gongsheng, head of the State Administration of Foreign Exchange, said further ‘infrastructure connectivity’ improvements will attract more foreign investors to the onshore bond market

PUBLISHED : Sunday, 26 March, 2017, 7:43pm
UPDATED : Sunday, 26 March, 2017, 10:04pm

China is planning more bond market infrastructure improvement beyond the mainland-Hong Kong trading connect scheme, the head of China’s foreign exchange regulator said.

Pan Gongsheng, head of the State Administration of Foreign Exchange, told the China Financial Forum on Friday that Beijing is mulling more “infrastructure connectivity” improvements to attract more foreign investors into the onshore bond market.

These measures would be in addition to the bond connect scheme pledged by Premier Li Keqiang earlier this month.

“China will steadily push forward the connectivity of China’s financial market infrastructure and cross-border cooperation. The bond connect scheme is just one of them. We’ll offer more,” said Pan, without elaborating.

Pan said China will enhance the relevant legal, accounting, auditing, taxation and credit rating policies, and will also expand tools for hedging risk.

His words were echoed by Xu Zhen, chairman of Shanghai Clearing House, which oversees a major part of China’s interbank bond market.

Xu told the Xinhua News Agency on Saturday that the clearing house would cooperate with the City of London, London Clearing House, the CME Clearing Europe, and Clearstream under Deutsche Börse AG, in a bid to strengthen the “connectivity of financial market infrastructure”.

Xu said the Shanghai Clearing House should prepare to align with these institutions’ standards before the “relevant policies land”.

He said the bond market should be the first step in internationalising the renminbi, before the equity markets.

At the end of February, China announced that it would give overseas investors access to its foreign-exchange derivatives market to allow hedging of bond positions.

The People’s Bank of China opened the country’s 58.2 trillion yuan interbank market to foreign institutional investors last year to attract long-term inflows amid a weakening currency and a flight of capital. Unlike other programmes that allow foreign capital inflow, this has no quota limitation.

Overseas investors held 852.6 billion yuan (US$124 billion) of onshore bonds at the end of last year, or 1.5 per cent of the market, which is the world’s third largest. The holdings fell by 3.5 billion yuan in February to 749.4 billion yuan, after a 25.9 billion yuan fall in January.

Pan also disclosed that more special drawing rights-denominated bonds are in the pipeline after the first was issued in September by the World Bank and the second by Standard Chartered in October.

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