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Macroscope | Connect programmes using Hong Kong’s strengths to cement key place in China’s opening-up
- As the Connect programmes evolve, it has become clear that Hong Kong’s role will not diminish as access to its and the mainland’s markets increases
- Its concentration of financial and legal expertise remains a key factor for the continued success of programmes in the Connect series
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The 26th anniversary of Hong Kong’s return from British rule coincides with the sixth anniversary of Bond Connect, one of China’s five groundbreaking programmes that allow foreign and domestic investors access to the other’s securities markets. In many ways, the success of Bond Connect reflects aspects of Hong Kong that make such innovations possible.
Bond Connect is divided into the northbound and southbound channels. As with the equities-focused Stock Connect programme before it, the northbound channel lets foreign investors enter the mainland interbank bond market via Hong Kong.
Meanwhile, the southbound channel allows mainland institutional investors to invest in overseas bonds by moving funds to Hong Kong. Its most innovative feature is in letting participants in two different trading venues – Hong Kong and the mainland – transact with each other in ways which would not be possible elsewhere.
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After Bond Connect was implemented, three major international bond indexes gradually included Chinese bonds. These are the Bloomberg Barclays Global Aggregate Index, JPMorgan Government Bond Index for emerging markets and FTSE Russell’s World Government Bond Index. This has prompted international investors to accelerate their entry into the market.
Since 2017, cross-border fixed income transactions have flourished in China. Last year, the volume of Chinese bonds traded rose by 25.8 per cent. As of the end of May, foreign capital holdings of yuan-denominated bonds reached 3.2 trillion yuan (US$448.2 billion), while this figure was only about 800 billion yuan before the implementation of the Bond Connect.
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The launch of Swap Connect – the fifth in the Connect series, joining stocks, bonds, exchange-traded funds (ETFs) and wealth management markets – further bolsters foreign participation in China’s bond market with its offer of more effective hedging against interest rate risks. Roughly US$3 trillion of swaps trade each year onshore in China, representing a far deeper and more liquid market than the Hong Kong non-deliverables market previously used by foreigners to manage their rates and currency risk.
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