China opens up $10-trillion bond market in liberalization step

SHANGHAI, China (UPDATED) – China on Monday, July 3, widened access to its $10 trillion bond market, which analysts said will boost Beijing’s drive to internationalize the yuan and more deeply integrate its markets with the world financial system.

The new window for foreign investors was opened via Hong Kong, where “qualified investors” will be able to buy bonds in China – the world’s third-largest bond market after the United States and Japan.

Qualified investors include central banks, sovereign wealth funds, and other major financial institutions, according to the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority, who jointly announced the move on Sunday, July 2.

Their statement said the “bond connect” platform between the Hong Kong and mainland Chinese markets went into “experimental operation” from Monday.

The move coincided with weekend celebrations for the 20th anniversary of Britain’s handover of Hong Kong to Beijing in 1997.

The PBoC said in a statement Monday that the new platform would promote integration between Hong Kong and mainland China, “promote Hong Kong’s long-term prosperity and stability, and provide a more convenient investment channel for overseas investors”.

“It will also steadily push forward the opening up of China’s financial market,” it said.

The link-up was launched in Hong Kong by the city’s new chief executive Carrie Lam, who hailed it as “another new chapter in the development of mutual capital markets access between the Mainland and Hong Kong”.

Foreign investors already have ways to access Chinese bonds but currently hold less than 1.5 percent of anything issued in China, according to estimates by Bloomberg.

China has been working to assimilate more with global markets, which allows access to increased foreign investment at a time of slowing domestic economic growth and helps internationalize its currency, which can increase a country’s global monetary clout.

Opening up

The new platform mirrors previously established link-ups between the share markets of Hong Kong and mainland China that now allow foreign and Chinese investors to buy stocks in the each other’s markets.

The connect scheme currently only allows foreign investors to buy Chinese bonds – including government, corporate and central bank debt – but is expected to become two-way eventually.

Analysts, however, said the new platform was not expected to lead to a rush of foreign investment because of factors including concern over the stability of the yuan, which has had a rocky year.

There are also fears over mounting Chinese debt levels, which have prompted Beijing to move aggressively in recent months to rein in runaway credit and prevent a default crisis.

“The bond connect definitely will have a positive effect (on China’s bond market) in the long-term, but … it will be rather slow,” said Liu Dongliang, a senior analyst with China Merchant Bank.

Still, analysts called the move a step toward Chinese debt being included in key global bond indices, which will encourage financial institutions to raise their investments in China bonds.

“The enhanced ease of investment under Bond Connect will attract more overseas funds, creating a more diversified investor base and further enhancing the market’s size and depth,” Helen Wong, HSBC Greater China chief executive, said in a statement.

“This will help pave the way for China bonds to be included in major global bond indices in the future.”

Ratings agency Moody’s called the new opening a “milestone” in yuan internationalization.

China has for years faced foreign complaints about restricted access to its markets, but has recently made a series of liberalization pledges.

Last month, leading index compiler MSCI said it would include Chinese shares in its global emerging-market indices, citing loosening restrictions on foreign ownership of Chinese stocks.

After years of runaway growth, China is grappling with slowing economic expansion, and has moved to stanch massive capital flight by Chinese funds seeking better returns overseas while trying to lure more foreign investment. – Rappler.com