Bond Connect finally launched on 3 July, with the new link giving foreign investors access to the full catalogue of bonds available on the China Interbank Bond Market (CIBM). While the scheme is not the only way offshore investors can buy Chinese bonds, at launch Bond Connect offers greater access, safeguards and cost effectiveness than existing schemes, and planned upgrades over the next 12 months will make it the most comprehensive China access programme.
Local markets, global infrastructure
Bond Connect is not the first avenue China has established for foreign investors to buy onshore bonds. The qualified foreign institutional investor programme (QFII) and its renminbi equivalent have been in operation for years, and last year eligible investors were given direct access to the CIBM. So what makes Bond Connect so special?
Far from being just another scheme, Bond Connect promises to be the optimal way for foreign investors to get comfortable with the onshore market. To start, there is no quota requirement or need for investors to identify the intended investment amount, making it the most accessible programme to date.
The link also uses the global infrastructure that is familiar to foreign investors. Tradeweb Markets is the first offshore trading platform announced for the scheme, with others set to join. Meanwhile, investors can select a global provider to hold assets in custody via a Hong Kong nominee account. Investors will also be able to use electronic requests for quotation.
At the same time, the trading calendar and hours of operation will be the same as those of the CIBM, giving investors the opportunity to become familiar with the Chinese market while having the comfort of an international infrastructure.
The best is yet to come
The above already makes Bond Connect a more flexible option than its predecessors and Hong Kong and China will continue to roll out new enhancements.
Tools to hedge risk have already been baked into the scheme but more can always be done. HKEX is working on introducing CNY derivatives and onshore repos that will give investors the ability to hedge exposure on Chinese bonds. The universe of eligible securities could also expand thanks to plans to include Chinese exchange-listed bonds under Stock Connect.
Another significant development, particularly given the global nature of the fund management industry, is that authorities are working on getting approval for UCITS funds to use Bond Connect.
Of course, a scheme this ambitious does not come without its challenges. One of the main sticking points is that at least initially, it will be easier to hedge FX risk in the offshore renminbi (CNH) market, than in CNY, meaning investors will be exposed to any mismatches between the two currencies. But for that reason, investors should ensure they pick a custodian that is able to offer the broadest range of services across China’s onshore and offshore markets.