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Bond Connect: China’s Southbound link scheme is live

China Bond Connect
China launches Southbound Bond Connect scheme with Hong Kong

China has opened a new channel for mainland investors making it easier for them to buy overseas bonds. The ‘Southbound Bond Connect’ draws capital from Mainland China’s institutional investors to Hong Kong’s primary and secondary bond markets.

As per the joint announcement by the People’s Bank of China and the Hong Kong Monetary Authority, the Southbound link is one of multiple ‘connect’ programs that link the mainland markets with Hong Kong.

The new channel launched on Friday completes the two-way loop of China’s bond market through Hong Kong. The northbound link was introduced in 2017, as a major channel for international investors to trade in China’s $17.5 tn domestic bond market. According to Bond Connect Co. Ltd, the average daily turnover through Bond Connect reached $4.09 bn in August, up 35% from the same period one year ago.

The Southbound Bond Connect was launched as China’s latest move to liberalise China’s capital markets and encourage outbound investment. Beijing also kicked off the Wealth Management connect programme earlier in September linking the southern province of Guangdong with Hong Kong and Macau.

However, the Southbound link launch has come at a tumultuous time with markets are roiled over concerns surrounding the fate of heavily indebted developer China Evergrande Group.

“Game-Changer” debut

According to bankers in the region, the link is expected to be a game-changer, in promoting cross-border trading and integrate the markets. The southbound link of the Bond Connect has an initial daily quota of $3.11 bn, and an annual quota of $77 bn, both of which can be adjusted based on cross-border fund flows.

Over 41 major Chinese banks along with 173 qualified domestic institutional investors members are eligible to participate during the initial phase. HSBC Holdings Plc and Standard Chartered Plc were among the major banks conducting trades on debut day and stated that they had assisted mainland clients to trade overseas bonds and closed multi-currency deals through the channel.

Meanwhile, the Hong Kong Monetary Authority has appointed 13 banks, including the three note-issuing lenders, as market makers for the scheme.

HSBC and the Bank of China (Hong Kong) were amongst the first banks to trade via the new scheme. According to the Bank of China, it completed 55 transactions worth $199.5 million for 27 mainland institutions in Hong Kong on the first day of trading.