New connection to Hong Kong to attract more bond investors

The Southbound Bond Connect launch ceremony takes place in Hong Kong on Friday. (Photo / Xinhua)

The initiative will also encourage the issuance of certificates abroad in the future.

Mainland Chinese investors will be further integrated into the international bond market through a new program allowing bond purchases in the Hong Kong offshore market. The program will also encourage the market to issue overseas bonds over time, analysts said.

The nation took an important step to further open the capital account last week, allowing net capital outflows equivalent to 500 billion yuan ($ 77.4 billion) per year through so-called Southbound Connect, the opposite direction of investment to the north under the Bond Connect program which channels funds between the mainland and Hong Kong bond markets.

This quota is relatively huge, already more than 50 percent of the cumulative ongoing quota of the Qualified Domestic Institutional Investor annual program, according to central bank data. Another setup for outbound investments is the QDII program.

The daily cap on net capital outflows through Southbound Connect is equivalent to 20 billion yuan.

Some analysts expect the new program to become China’s second overseas investment program in two years, after the Stock Connect program. Some analysts even predict that authorities will abolish annual and daily quotas in the next three to five years, like they did for Stock Connect.

This means that the program will allow an increase in outflows denominated in foreign currencies, facilitating more balanced cross-border capital flows over time. Under the current framework, outward capital flows will be denominated in foreign currencies, according to Becky Liu, head of macro strategy for China, Standard Chartered Bank.

In the short term, the launch of the program is expected to ease the pressure of capital inflows and ease the pressure on the appreciation of the Chinese yuan, Liu said.

“But unlike Stock Connect, we expect Bond Connect, including North Connect and South Connect, to remain a global capital inflow program for China, given the significant under-allocation of RMB-denominated assets by global investors, while the much lower natural demand for foreign currency assets by Chinese institutions, ”Liu added.

On the first trading day (Friday), more than 40 mainland institutional investors and 11 Hong Kong market makers completed more than 150 bond transactions for a transaction volume of around 4 billion yuan. The volume was larger than analysts expected, according to the People’s Bank of China, the central bank.

The opening up of trade to the south will support the development strategies of companies on the continent abroad. It also indicates the central government’s strong support for Hong Kong’s status as an international financial center, PBOC vice-governor Pan Gongsheng said at the opening ceremony on Friday.

The central bank will continuously work with the Hong Kong Monetary Authority and infrastructure providers to improve Southbound Connect policy, he said.

Li Bing, head of Asia-Pacific at Bloomberg, told China Daily that Southbound Bond Connect will be a gateway to new opportunities and has a huge impact on the Hong Kong bond market.

“We are likely to see an increase in cross-border capital flows and a more active secondary market,” Li said.

Financial institutions, which play a market-making role, are preparing to become true providers of liquidity with more onshore investors participating in the offshore bond market. Improved liquidity will encourage more issuers to consider raising funds by issuing bonds in Hong Kong, thereby boosting the primary market, Li said.

He also expects more onshore companies to consider issuing more dim sum bonds, a type of yuan-denominated bond, in Hong Kong.

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