Details of a trading link connecting China’s bond markets to the outside world are likely to be announced this year, the head of a pan-Asia markets association says.
However, industry observers are sceptical over the mechanisms which could be used in Bond Connect due to different trading systems in place on either side of the border.
And questions have been raised as to whether China’s authorities will agree to a full liberalisation of the mainland fixed-income market, given their desire to avoid large inbound capital flows.
Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association (Asifma), told AsianInvestor yesterday that he saw Bond Connect going live in in 2016.
“It is possible for it to be announced this year, but we will not be surprised if it happens in 2016,” Austen said. “We see the Shenzhen-Hong Kong Stock Connect [will happen] this year, and hopefully mutual recognition this year as everything has been ready, then fixed income will be the next step.”
Speculation over a cross-border bond trading link started after the launch of the Shanghai-Hong Kong Stock Connect last November, with an extension to Shenzhen another future development. The China Government Securities Depository Trust and Clearing, the mainland’s bond clearing house, said in February it was studying the possibility of launching a scheme to link the onshore and offshore bond markets.
Asifma is currently drafting a proposals on what it would like to see in Bond Connect, and the association plans to lobby Chinese regulators.
However, investors are not totally optimistic over the bond link’s prospects. One reason is China’s interbank bond market, accounting for 95% of the Rmb35.9 trillion ($5.8 trillion) onshore bond market, is tightly controlled by the People’s Bank of China through licences and special approvals to trade bonds.
Another reason for their pessimism is the different trading mechanisms used in China’s onshore bond market and foreign developed countries. In China, interbank bond market investors have to contact trading counterparties individually, whereas the overseas practice is to go through brokers.
Bond Connect was one of the hot topics at Asifma’s 5th annual Offshore RMB Markets Conference in Hong Kong yesterday, but speakers had concerns about it.
“It is a matter of the accessibility to the [onshore] bonds. If RQFII [renminbi-qualified foreign institutional investors] quotas were lifted, the bigger question is if we need a Bond Connect,” said Lachlan Campbell, chief operating officer at Income Partners.
Stephen Chang, managing director and head of Asian fixed income at JP Morgan Asset Management, raised the issue of northbound Hong Kong-mainland trades.
“A lot of Bond Connect discussion I have seen so far is about northbound,” Chang said. “[It depends on] how much China policymakers would open up, given they probably do not want foreign money to come in so quickly.
“[China] has opened up [the bond market] through RQFII, and maybe when they have experimented long enough, they would like to do Bond Connect with some similarities to Stock Connect that we have seen so far.”
Despite such concerns, Asifma has a positive view of the bond link, as it will be a major reform for China.
“If we try to step back and see a bigger picture of China's economic and political situation, as well as the moves from an export-driven economy to a consumption-driven economy, it will need a well-developed capital market includes the bond market,” said Austen.
“[China] cannot open up completely and allow foreign investors to fully access the onshore bond market - that is a step too far for the mainland’s authorities.”
Austen believes the bond link will be China’s response to pressure from investors for an opening of the market.
He agreed that a bond trading link would be more difficult to achieve than Stock Connect, but there would be options. The first and easiest way would be to start it in the exchange market, with a link to the Hong Kong or Singapore Exchange.
Another option would be to develop a multi-dealer trading platform, using developed market practices. “The bond platform can be developed quite easily since the technology is not revolutionary, and allowing foreign investors to access it could drive liquidity in the platform,” said Austen. “Another option would be to use an existing mechanism such as the RQFII scheme.”
Registered foreign investors are effectively monitored by China’s policymakers, but Bond Connect accounts could follow a daily quota limitation as is used on Stock Connect.
A survey released by the Hong Kong Investment Funds Association in January found that foreign investors were in favour of Stock Connect being expanded into a fixed-income trading link.