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Discussion of Bond Connect

Written by: Ms. Melody Guo – Associate

As the trends of economic liberalization and globalization are sweeping across the globe, China and Hong Kong have kept pace with the world by launching the Shanghai Connect and Shenzhen Connect respectively. This has not only reinforced Hong Kong’s position as an international financial hub, but also strengthened the financial collaboration between Hong Kong and China.

To further reinforce the collaboration under Mutual Market Access scheme between the China and Hong Kong bond markets, the People’s Bank of China and the Hong Kong Monetary Authority (“HKMA”) jointly announced the cooperation plan on 16 May 2017. China Foreign Exchange Trade System and Hong Kong Exchanges and Clearing Limited (“HKEX”) then announced the establishment of a joint venture company, Bond Connect Company Limited, on 7 June, which is responsible for supporting related trading services of the Bond Connect. The HKEX, which has 40% ownership of the Bond Connect Company Limited, shall contribute equity capital of around 20 million dollars.

Implications of Bond Connect
(a) Bond Connect has expanded the Mutual Market Access scheme of Shanghai Connect and Shenzhen Connect from stocks into a new asset class of fixed income. Investors from China and overseas can trade in each other's bond markets through the infrastructure linkage in Hong Kong. The launch of Bond Connect can thus enhance the financial market position of Hong Kong, and promote the open development of the financial market in China.

(b) Bond Connect adopts the predominant system in international bond markets and conducts the settlement through the Central Moneymakers Unit (CMU) of the HKMA. This provides a convenient gateway for the foreign institutions to access the market and attracts more foreign investors to invest in China’s bond market, increasing the needs of Hong Kong’s financial services.

(c) Bond Connect not only provides opportunities for major securities firms to collaborate with international securities exchange platforms, it also allows investors to choose from varied bond products. This can further enhance the development of the bond market, balance cross-border capital flows, strengthen the Hong Kong’s position as an international financial hub, and promote the globalization of China’s financial market.

 

Precautions against Major Risks in Bond Connect
(a) According to the announcement, Bond Connect will be divided into “Northbound trading” and “Southbound trading”. To avoid the risks such as fluctuations in exchange rates and capital outflow, Northbound trading with no investment limits will commence first while Southbound trading will be launched at a later maturity stage.

(b) To minimize the risks of market volatility and the transaction risks of foreign investors, Bond Connect will adopt the common market maker trading model in the initial phase.

(c) To effectively supervise the Bond Connect, the People’s Bank of China and HKMA had signed a memorandum of understanding to ensure the sufficient mutual support in supervision and information exchange, and reinforcement of the enforcement cooperation.

 

According to the People’s Bank of China, as of March 2017, China has hosted the world’s third largest bond market with an amount of RMB $65.9 trillion dollars. The number of foreign investors has reached over 473 with a total amount of investment exceeding RMB $800 billion dollars as of May 2017. Some say that Bond Connect is the express railway opening China’s bond market in which Hong Kong will play an important role in connecting China and the world.


Source:
CFETS and HKEX Establish Joint Venture for Bond Connect, Hong Kong Exchanges and Clearing Limited, 7 June 2017.

Joint Announcement of the People’s Bank of China and the Hong Kong Monetary Authority, Hong Kong Monetary Authority, 16 May 2017.

Media Q&A of China and Hong Kong Bond Connect, People’s Bank of China, 16 May 2017.


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