China clearing house considers launching 'bond connect' scheme
Mainland clearing house studies possible launch of through train link for onshore and offshore debt markets to give broader foreign access
The mainland's bond clearing house is studying the possibility of launching a scheme linking the onshore and offshore bond markets - similar to the Shanghai-Hong Kong stocks through train - which would give foreign investors broader and freer access to the world's third-largest debt market.
China Government Securities Depository Trust and Clearing, one of the two state-backed clearing houses on the mainland, had expressed interest to regulators and industry groups in Hong Kong in establishing a "bond connect scheme" following November's successful launch of the stocks through train scheme, sources said.
The trust was set up by the People's Bank of China in 1996 to provide bond depository, custody and settlement services for the mainland's interbank bond market. More than 93 per cent of bonds on the mainland are traded in the interbank market, with four in five interbank bond trades cleared and settled through the trust, which had 28.8 trillion yuan (HK$36.3 trillion) worth of outstanding bonds in its custody in November.
Consultations about the framework for a bond trading link began after the trust expressed an interest. The Treasury Markets Association, a group led by Hong Kong Monetary Association deputy chief executive Peter Pang Sing-tong, has submitted a proposal regarding the bond connect initiative, according to a source at a major foreign bank's trading desk.
Separately, the Asia Securities Industry & Financial Markets Association, which represents more than 70 banks, asset managers and law firms, is working on another proposal and plans to lobby the regulators.
Patrick Pang, managing director and head of fixed income and compliance at ASIFMA, said: "After the success of the stock connect scheme, we think that there is room to do more. Bond connection is clearly an important direction."
The HKMA and the trust signed an agreement in April 2004 to establish a link between the HKMA's Central Moneymarkets Unit and the Government Securities Book-entry System operated by the trust. The link enables authorised investors on the mainland to hold and settle Hong Kong and foreign debt securities lodged with the moneymarkets unit.
Western investors currently have limited access to the mainland bond market, with just 1.5 per cent of onshore bonds owned by foreign investors through quota-based programmes such as the qualified foreign institutional investor scheme. A bond link would also add another channel for yuan to circulate between the onshore and offshore markets, besides the stocks through train and quota-based investment schemes such as QFII and the renminbi qualified foreign institutional investor programme, cementing Beijing's ambition to globalise its currency.
The 10-year China government bond yields about 3.5 per cent while the US 10-year Treasury yields about 1.89 per cent.
A third of the mainland's onshore bonds are issued by the Ministry of Finance and local governments, with another third issued by policy banks such as China Development Bank and the remaining third issued by companies.
