At the launching ceremony for the bond connect between mainland China and Hong Kong on July 3rd, PBOC's Deputy Governor Pan Gongsheng said that "the bond link scheme will serve as a bridge to connect mainland markets with worldwide markets".
Chinese bonds can now be bought by banks, insurers and fund managers via The Bond Connect scheme in Hong Kong, opening up the China's US$9trn bond market to widespread foreign investment for the first time. The launch of the programme was timed to coincide with the 20th anniversary of Hong Kong's handover to Chinese rule and trading will initially be "northbound", meaning foreign investors will be able to buy and sell Chinese bonds. Yet, unlike the stock links, the bond connect will only be one-way for now, allowing foreign investors to purchase Chinese bonds through the channel, but not vice versa.
Ivan Chung, Associate Managing Director at Moody's Asia Pacific said rising internationalization of the Chinese onshore bond market, as facilitated by Bond Connect, will equip onshore bonds for inclusion in more global bond indices.
The connection will increase the supply of yuan-denominated assets that can be held by global investors as Beijing steps up the internationalization of its currency. We will increasingly see Central Banks buying Chinese government bonds. HSBC said it had completed its first deal as a market maker through the link but did not give additional details.
Overseas investors have been reluctant to enter the market amid fears over the stability of the Chinese yuan, and over potential delays to Beijing's reforms of the capital markets.
Bond Connect does away with onerous requirements for outsiders and eases worries about taking profits out of China, but downsides include worries about the depreciating yuan and reliability of China's domestic credit rating agencies.
"The enhanced ease of investment under Bond Connect will attract more overseas funds, creating a more diversified investor base and further enhancing the market's size and depth", said Wong. As of the end of April, among the 44.99 trillion yuan of bond custody under the China Government Securities Depository Trust & Clearing Co Ltd, foreign investors only account for 1.7 percent.
Officials are still exploring "southbound" access for mainland investors, and said it depends on demand.
The bond program follows the launch of the Hong Kong and Shanghai stock connect scheme in November 2014 and the Hong Kong and Shenzhen stock program in December 2016.