China’s central bank to scrap barriers in connect scheme to draw inflows to bond market

China’s central bank said on Tuesday it would remove key barriers to the bond connect scheme in the coming months, making it easier for foreign investors to buy onshore yuan-denominated bonds.

The People’s Bank of China (PBOC) vice-governor Pan Gongsheng was quoted as saying in Hong Kong that enhancements to the scheme would include same-day bond delivery versus payment (DVP) in August, block trading to be launched in mid-July, and tax clarification on the horizon, according to local media reports.

The enhancements could increase trading volumes in the one-year-old scheme, whose daily average turnover has hovered at a modest 3 billion yuan (US$451 million) because of the technical limitations that investors face. The scheme allows foreign investors to trade in China’s US$9 trillion bond market, the third largest in the world, using Hong Kong as a conduit.

Some policymakers are worried that the further opening up China’s capital account for foreign investment could fuel fund outflows and greater currency fluctuations, especially in the wake of growing trade tensions with the US.

But the planned enhancements and further reforms also underscore Chinese policymakers’ growing tolerance of greater market volatility and determination to push through new policies to deepen its capital markets with a broader set of foreign participants.

Upgrades to DVP, block trading, and tax clarification are the three key requirements for mainland Chinese bonds to be included by global index providers.

“These measures can foster greater participation by foreign investors as they can give greater certainty and clarity to investors; increase the type and range of products, and further enhance efficiency,” said Sally Wong, chief executive of Hong Kong Investment Funds Association.

Future developments also included additional onshore dealers, opening up the repo and derivatives market, a reduction in transaction fees and additional global access platforms to be linked to the bond connect scheme, PBOC’s Pan said.

“These enhancements would encourage more cross-border investments in China’s onshore bond market and demonstrate its long-term ambitions of opening its capital markets as well as the internationalisation of the yuan,” said James O’Sullivan, Standard Chartered’s head of securities in Hong Kong.

Once the bond connect’s technical problems are resolved, domestic yuan-denominated bonds are expected to be included in the Bloomberg-Barclays Global Aggregate index in April 2019, which analysts estimated, will result in US$200 billion to US$300 billion of inflows into China from foreign passive asset managers.