Doubts raised over copying Stock Connect to bond market

While investors are keen to see China's bond market opened up, there are major barriers to copying the Stock Connect model.

There is debate about the viability of Bond Connect, an embryonic concept that seeks to replicate the success of the Hong Kong-Shanghai Stock Connect albeit for bonds.

Bond Connect, which has the backing of China Central Depository & Clearing, a central securities depository (CSD) on the mainland, would theoretically facilitate a link between onshore and offshore bond markets. China’s bond market is the third largest globally, and any liberalisation would be welcomed by fixed income investors.

It is believed impacted instruments could include Chinese government bonds and corporate bonds, while Chinese investors would get exposure to offshore Chinese bonds denominated in Dollars, Euros or Japanese Yen.

Vicky Tsai, Head of Investor Services, China at Deutsche Bank Global Transaction Bank, said Bond Connect would take some time to develop, adding further reforms to the interbank bond market were likely to happen sooner.

The Bond Connect initiative comes following the People’s Bank of China’s (PBOC) reforms to the interbank bond market whereby it eased restrictions on foreign investors transacting in bonds, interest rate swaps and repurchase agreements. The rules mean large foreign investors do not need pre-approval from regulators before they enter the $5.7 trillion interbank bond market.

Nonetheless, Sophia Chung, director of HSBC Securities Services in China, highlighted the interbank bond market reforms were currently mainly aimed at sovereign wealth funds or central banks.  However, the market is looking forward to further expansion to foreign asset managers, she added.

At present, investors hoping to invest in mainland bonds do so through the quotas assigned under the Qualified Foreign Institutional Investor (QFII) or Renminbi Qualified Institutional Investor (RQFII) schemes.  The quotas can be restrictive, and obtaining a QFII or RQFII quota can be a time-consuming process.  

Not everyone is convinced by Bond Connect. One senior executive, speaking anonymously, said the infrastructure was not present for Bond Connect and replicating Stock Connect was not an option as bonds are traded over-the-counter. As such, he said China would need to create a trading venue for bonds.