The long-awaited bond connect scheme between the Chinese mainland and Hong Kong was launched on Monday at Hong Kong Exchanges and Clearing (HKEX), with the northbound trading starting its initial trial operation the same day.
The scheme marks a milestone in China's opening-up of its capital market, experts said, and comes after the launch of stock connect schemes between Hong Kong, Shanghai and Shenzhen. It will also facilitate the domestic bond market's integration with the global one and will accelerate the internationalization of the yuan, they noted.
To assist the launch, the Bond Connect Company, jointly established by the China Foreign Exchange Trade System and HKEX, was also launched in Hong Kong on Monday. The joint venture is expected to handle bond connect-related trading services, and will offer assistance for investors.
The bond trading link will give foreign investors access to China's trillion bond market, which is currently the third-largest in the world, without having to create onshore accounts.
The bond connect scheme between the Chinese mainland and Hong Kong completed transactions worth a total of 7.048 billion yuan (.04 billion) on Monday, the People's Bank of China said.
HSBC and BOCHK Asset Management announced on Monday that they had completed the first deal using the bond connect, making them the first batch of institutions to trade with foreign investors under the scheme.
In addition, seven institutions - China Development Bank, Agricultural Development Bank of China, China Huaneng Group, China Three Gorges Corporation, China Unicom, Aluminum Corporation of China and Malayan Banking Berhad - have also announced plans to issue bonds under the scheme, the Economic Observer reported on Monday. For the next step, newly appointed Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor said at the opening ceremony of the bond connect that the two sides will work on southbound trading, enabling mainland investors to trade in Hong Kong's bond market, the report noted.
Open the market
"As foreign investors' demand for onshore bonds continues to surge, the bond connect will push forward the Chinese mainland's opening-up of its financial market," Lam was quoted in the report as saying.
Currently, the openness of China's bond market still lags behind that of developed nations, Lian Ping, chief economist at Bank of Communications, said in a note sent to the Global Times on Monday. He added that the domestic bond market has also suffered in recent months due to tightened monetary policy and increased financial supervision.
Currently, around 473 foreign financial investors have entered the Chinese bond market. But their investment volume represents only 1.2 percent of the total market.
The bond connect scheme will allow global investors to have more convenient and effective access to the Chinese market, while also "diversifying the investors' structure and expanding trading strategies," Zhang Tingting, vice president of the international business department at financial services provider CCXI, told the Global Times.
In the long term, "the scheme will allow the domestic bond market to be aligned with global standards, and to gradually catch up with foreign counterparts" in areas such as product quality and rating standards, Zhang noted.
As a result, the rising internationalization of the Chinese onshore bond market "will allow onshore bonds to be included in more global bond indexes" and will contribute to the internationalization of the yuan as it will greatly enlarge the pool of investable assets denominated in yuan, Ivan Chung, associate managing director at Moody's, was quoted as saying in a statement sent to the Global Times on Monday.
In June, China's stock market was included in MSCI's Emerging Market Index, following continuous efforts in China to open up the country's financial market.
But experts noted that it is not clear whether there will be a large inflow of foreign capital to the domestic market in the near future.
"Foreign investors also have their concerns because they have limited channels to form a deep understanding of the Chinese market," Zhang said, noting that the increasing number of cases of bond defaults in the mainland is another source of concern.
Besides, the lack of risk-hedging mechanisms also puts off foreign institutions from participating, especially in the debenture bonds sector, she added.