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Chinese bonds more popular than ever with foreign investors as Bond Connect turns 7
- Since the link launched in July 2017, overseas holdings of onshore Chinese bonds have nearly quintupled to US$580 billion
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Foreign investors have advanced their holdings in China’s US$20 trillion domestic bond market since the Bond Connect mechanism was introduced to link them to new growth and diversification opportunities in the world’s second-largest economy. As the mechanism celebrates its seventh birthday, further enhancements are poised for launch.
Since the Northbound Bond Connect commenced trading in July 2017, overseas investors’ holdings of onshore Chinese bonds have jumped nearly 4.8 times to 4.22 trillion yuan (US$580 billion) in May, according to official data. This also marked the ninth consecutive month that foreign investors added to their exposures.
As Beijing issues ultra-long treasury bonds to finance the country’s infrastructure projects, financial authorities in Hong Kong and mainland China have vowed to further enhance the Bond Connect scheme, which allows mutual market access through financial connections between mainland China and Hong Kong. Southbound trading started in September 2021.
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“The onshore bond market has been one of the top performing fixed-income markets over the past year, with yield on the downward trend and many investors having realised capital gains from their investment,” said Lillian Tao, head of macro and global emerging-market sales for China at Deutsche Bank. Offshore investors could keep their funding costs manageable as they leveraged US dollar swapped yuan funding, she added.
“At present, international investors hold 4 trillion yuan of onshore bonds, including 3.1 trillion yuan of treasury and policy bank bonds,” Kenneth Hui, executive director of the Hong Kong Monetary Authority (HKMA), said in a media briefing on Friday. “If they can use some of these holdings as collateral to get liquidity from the HKMA, it will encourage the international investors to be more willing to hold the onshore yuan bonds.”
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Hui’s comment referred to a measure started in February that allows Chinese government bonds and policy bank bonds to serve as collateral in HKMA’s RMB Liquidity Facility.
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