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Hong Kong and PBOC studying ‘southbound’ Bond Connect

Hong Kong Monetary Authority CEO Eddie Yue Wai-man sees capital outflows and geopolitical risks as key challenges over the next few years.
The Hong Kong Monetary Authority sits on the world’s seventh-largest foreign-currency reserves, a financial war chest that quintupled over 25 years to US$460 billion at the end of May. File photo: Reuters

(ATF) The Hong Kong Monetary Authority is studying the framework of a “southbound” leg of the Bond Connect scheme with the People’s Bank of China (PBoC), an HKMA spokesperson said this week.

Eddie Yue, Chief Executive of the HKMA, said the ‘northbound’ Bond Connect had been well received by international investors, and its success has laid a solid foundation for a ‘southbound’ channel. 

A ‘northbound’ leg of the Bond Connect scheme was launched in July 2017, giving overseas investors access to China’s onshore bond market.

“When discussing the features of the Southbound Bond Connect with the Mainland authorities, we will consider how best to support the two-way opening up of the Mainland’s financial markets, ensure proper risk controls, as well as to promote the development of Hong Kong’s bond market and strengthen Hong Kong’s status as an international financial centre,” Yue said.

Yue believes that launching a Southbound Bond Connect will facilitate a diversified asset allocation for investors on the mainland, while consolidating Hong Kong’s role as an intermediary for capital flowing into and out of China.

“It will generate enormous opportunities for Hong Kong’s financial services industry,” he said. 

“The HKMA and PBoC will form a working group to take forward the study, and engage the industry as appropriate,” an HKMA spokesperson told Asia Times Financial, adding that more details will be announced when available.

Meanwhile, Charles Li, chief executive of Hong Kong Stock Exchange, told Asia Times Financial that launching a southbound leg would be a natural next step that completes the Bond Connect programme.

“I am confident that a future southbound leg of Bond Connect will have as much success as the northbound programme,” he said.

If launched, Southbound Bond Connect will be a convenient channel for onshore investors to buy bonds in the Hong Kong market, alongside Qualified Domestic Investors (QDI), cross-border total return swap (TRS) and Hong Kong public funds.

‘Time to improve the bond connection’

Xing Zhaopeng, China Markets Economist from ANZ Research, believes that the new discussion stems from the recent developments of renminbi appreciation and the rising importance of the Hong Kong bond market.

“The renminbi’s exchange rate has steadily risen since August by 6.4% against the USD and 4.6% against the FX basket, mainly because FX flows have been imbalanced by the pandemic and also US-China yield differentials. This will be a good time window for Chinese investors to rebalance global portfolios,” Xing said.

“More importantly, Hong Kong has become the most important market for Asia G3 bonds, with Chinese issuers accounting for nearly 60%. It is time to improve the bond market connection between Mainland and Hong Kong,” he added.

However, given that there are already several channels through which onshore investors can buy bonds in offshore markets, ANZ Research believes that the outflows will be marginal compared with inflows. 

International institutional investors have increased their holdings of Chinese bonds since December 2018 due to several factors such as renminbi appreciation, higher yields, and growing optimism for the economy. 

Data from Bond Connect showed that northbound trading reached a record high in November with 5,895 transactions totalling 485 billion yuan (US$74.3 billion).

“We believe it (launching Southbound Bond Connect) is more likely to be a gesture to show the two-way opening-up of China’s financial system, noted as a target in the 14th Five-Year Plan,” Xing said.


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Iris Hong

Iris Hong is a senior reporter for the China desk, and has special interests in fintech, e-commerce, AI, and electric vehicles. She began her career in 2006 and worked for Interfax News Agency and for PayPal before joining Asia Financial in July 2020. You can reach out to Iris on Twitter at @Iris23360981


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