Hong Kong Bond Connect scheme could play crucial role in getting China’s onshore bonds into global indices, say analysts
- Market liquidity, forex issues – cited by FTSE Russell when it left China out of its world bond index – could be improved by Bond Connect, traders say
- Number of foreign institutional investors using the cross-border bond trading channel has more than doubled in the last nine months
Bond traders and portfolio managers say liquidity in the China onshore bond market has improved over the past year, partly because the Hong Kong Bond Connect scheme has given investors easier access.
A record 338.6 billion yuan (US$47.6 billion) of Chinese onshore bonds changed hands in August.
Chinese government bonds were excluded from the FTSE Russell World Government Bond index in its annual review last month, but analysts say the Bond Connect mechanism could be a catalyst that eventually leads to their inclusion by the global index compiler. FTSE Russell’s next review is scheduled for March next year.
Launched in July 2017, Bond Connect enables offshore investors to buy and sell in China’s interbank bond market and hold these securities in their Hong Kong custodians’ accounts.
“We have joined the Bond Connect this year and we have diverted some of our Chinese bond trading volume onto it, which gives us more flexibility in conducting foreign-exchange hedging transactions,” said Dennis Wong, head of markets, North Asia, at ANZ.
Through the Bond Connect, foreign investors are free to make currency transactions with multiple banks, rather than relying on one onshore custodian bank when accessing the interbank bond market directly, market participants said.