Bond Connect launch details expected within weeks

Work also continues on planning a Commodities Connect for cross border metals trading, Hong Kong Financial Secretary Paul Chan Mo-po tells forum

PUBLISHED : Wednesday, 10 May, 2017, 11:54am
UPDATED : Wednesday, 10 May, 2017, 10:55pm

Hong Kong Exchanges and Clearing (HKEX) is expected to announce the launch details of its planned Bond Connect within the next few weeks, and also continues working on planning for a Commodities Connect for cross border metals trading, according to the city’s top finance official.

“Hong Kong and the mainland will soon have the Bond Connect which will be the first cross border bond trading programme for foreign investors to invest in the mainland bond market,” said Financial Secretary Paul Chan Mo-po, in his keynote speech to the LME Asia Week forum in Hong Kong on Wednesday.

Details about the Bond Connect’s clearing and settlement arrangements will be announced within the next few weeks, HKEX chief executive Charles Li Xiaojia also confirmed at the same forum.

While neither could give exact timings, Premier Li Keqiang in March indicated the new scheme will happen this year, while brokers speculate a launch could come as early as July to mark the 20th anniversary of the handover of Hong Kong back to China.

China is now the world’s third largest bond market, worth US$7.5 trillion, after the US at US$35 trillion and Japan at US$11 trillion.

However, foreigner investors hold less than 3 per cent of that Hong Kong total, as the country has not yet opened up its capital market, according to Standard Chartered Bank.

Commentators say the new Bond Connect will be a major step forward in opening up China’s bond market and strengthening Hong Kong’s role as gateway for foreign investment into the mainland.

HKEX has already launched two Stock Connects, with Shanghai since November 2014 and Shenzhen since December last year, which allow international investors to trade in A-shares in the two mainland bourses via Hong Kong, while mainland investors can trade Hong Kong stocks.

Li also said HKEX will then work on creating a Commodities Connect aimed at linking the Hong Kong exchange’s commodities platform with the London Metal Excahange (LME), which it owns, and is proposing a platform in Qianhai – the special economic zone next to Shenzhen which is an hour’s drive from Hong Kong – to link with mainland commodities markets in Dalian and other cities.

“We would like to see more cross trading and products listing in our platform and mainland bourses,” Li said.

On Thursday, the HKEX chief executive is due to lead a visit by brokers and the media to its proposed site for setting up a metals trading platform in Qianhai.

The HKEX spent £1.39 billion (US$1.79 billion) in December 2012 on the LME in a bid to expand into commodities trading and cut its reliance on equities.

While the London exchange is contributing to the HKEX bottom line, the acquisition has done little to help it expand its own commodities trading levels.

China has the Belt and Road Initiative, which will lead to 65 countries carrying out a lot of infrastructure projects in coming years. This will boost demand for commodities being traded in Hong Kong
Paul Chan Mo-po, Hong Kong’s Financial Secretary

The six metal contracts available in Hong Kong signed only eight trades daily on average in the first four months of this year, down 90 per cent from 86 contacts per day during the same period last year.

Copper remained the most popular, with a daily average of four contracts, zinc had three, and aluminium and nickel both two, with no lead or tin contracts traded at all.

Brokers say all those contracts traded in Hong Kong were settled in cash with no physical delivery, which was why they failed to attract mainland end-users. Trading at the LME in London has physical delivery and can better meet the needs of end-users.

Financial Secretary Chan, however, is confident for the future.

“China has the Belt and Road Initiative, which will lead to 65 countries carrying out a lot of infrastructure projects in coming years. This will boost demand for commodities being traded in Hong Kong,” he said – an opinion shared by Li who added more new product launches would improve commodity trading levels in the city.

The HKEX is also expected, for the third time, to try and launch gold futures – denominated in US dollars and yuan – in the third quarter to allow trading in the precious metal.

The exchange introduced the products in the mid-1980s and again in 2008, but scrapped them later due to lack of interest.

The LME in London will also launch gold and silver spot and futures trading on July 10.

“The gold products in Hong Kong and London will allow investors to trade around the clock. They will be the flagship products of our commodities trading in future,” Li said.