Hong Kong connectivity pays off in bonds bonanza
- Liquidity begets liquidity; and Hong Kong’s financial policy that is closely coordinated with mainland China has shown to be a winning formula
Every day, in the first five months, transactions worth almost 40 billion yuan (HK$43 billion) flowed northwards into the mainland’s bond market. By any standard, it is a staggering figure, but traders think that will be far from the limit in future.
It all comes down to Bond Connect, which has just celebrated its sixth anniversary as a key part of the “super-connectivity” of Hong Kong to the mainland capital market.
During that time, monthly holdings by overseas investors in China’s fixed-income market almost quadrupled to 3.185 trillion yuan, from 842.5 billion yuan.
Liquidity begets liquidity; and the city’s financial policy that is closely coordinated with the mainland has shown to be a winning formula. As a result, Hong Kong as a “super connector” between the mainland and the world is now well trusted by international investors. As a yuan business hub, this role is also irreplaceable.
Besides the well-established Bond and Stock Connect, other component schemes include the recently launched northbound channel of Swap Connect, which allows outside investors to trade mainland interest rate swap contracts, and the new “dual counter model” that gives investors the option of using offshore yuan funds to buy yuan-denominated shares listed in Hong Kong.
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Meanwhile, the Hong Kong Monetary Authority, the city’s de facto central bank, can further improve settlement efficiency and enhance new measures to raise the city’s competitiveness, such as optimising the southbound Connect for mainland investors and institutions.
For example, central banks on both sides of the border are exploring the possibility of enabling professional investors to trade repurchase agreement (repo) transactions on the Bond Connect.
A repo trade enables a borrower to offer high-quality securities such as government bonds as collateral to raise cash, usually overnight. The borrower can then repay the loans plus interest to get the bonds back.
Money talks. And that’s the basis of the unstoppable development of the city’s super-connectivity despite being often dragged into controversies from the rivalry between China and the United States.
As Beijing likes to drum up the message that the nation is open for business, few places are better placed to deliver than Hong Kong.
