Foreign investors have advanced their holdings in China’s US$20 trillion domestic bond market since the Bond Connect mechanism was introduced to link them to new growth and diversification opportunities in the world’s second-largest economy. As the mechanism celebrates its seventh birthday, further enhancements are poised for launch.
Since the Northbound Bond Connect commenced trading in July 2017, overseas investors’ holdings of onshore Chinese bonds have jumped nearly 4.8 times to 4.22 trillion yuan (US$580 billion) in May, according to official data. This also marked the ninth consecutive month that foreign investors added to their exposures.
Currently, more than 50 per cent of Swap Connect collateral is cash, according to Hui. Using onshore bonds as collateral will reduce liquidity costs and strengthen capital management, he said.
HKMA executives said the measure would promote the synergies between Bond Connect and Swap Connect, invigorate market participation in the Connect schemes, and benefit the yuan’s internationalisation.
“Investors are looking for more FX and rate-hedging tools as well as funding access,” said Ju Wang, head of Greater China foreign exchange and rate strategy at BNP Paribas. Global investors are watchful for announcements regarding broader access to China’s onshore repo market and overseas China government bond futures, she added.
Access to the over-the-counter wholesale funding market is currently limited to sovereign entities, multilateral financial institutions and offshore yuan clearing banks.
Last November, bourse operator Hong Kong Exchanges and Clearing said it would launch China treasury bond futures to help regional and global investors more effectively manage their interest rate and investment risks.
HKMA’s Yue said these measures are still being negotiated and the organisation hopes to announce them soon.
Riad Chowdhury, head of Asia-Pacific at MarketAxess, a bond trading platform, expressed optimism about the long-term potential of China’s bond market.
“China is the world’s second-largest economy with various growth engines, which will probably need to come to the market to issue bonds,” he said. “As they keep issuing bonds, they’ll see interest from investors all over the world, and this kind of virtuous cycle will continue.”
China has moved towards “high-quality” development and technological innovation as new engines in its economy. Bond issuances will help finance the new growth, Chowdhury said.
Foreign ownership in China’s onshore bond market remains relatively low compared with other global economies, said Freddy Wong, head of Asia-Pacific at investment manager Invesco Fixed Income. “Onshore yuan bonds have a low correlation with other major bond markets and bond indices, as well as US and Chinese equities,” he said. “Hence onshore yuan bonds serve as good diversification for global investors.”
