Southbound trading under Bond Connect to go live in one week’s time

Regulators give the green light to a Southbound Bond Connect channel, connecting Mainland China investors to the Hong Kong bond market to encourage outbound investment.

The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China’s (PBoC) announcement that Southbound trading under its Bond Connect will launch on 24 September has been described as landmark move between the Hong Kong and Mainland capital markets.

Tradeweb and Bloomberg have already moved to facilitate trading for the new scheme, while the HKMA has still yet to designate the market makers for the scheme but is expected to in the coming days.

Northbound trading under Bond Connect – which provided overseas investors with access to the world’s second largest bond market – kicked off in 2017 in line with the liberalisation of China’s capital markets.

Following the Northbound initiative’s relative success, the introduction of Southbound trading under Bond Connect will provide Mainland institutional investors with a channel to invest in the Hong Kong bond market via the connection between the Mainland and Hong Kong financial infrastructure services institutions.

Justin Chan, head of Greater China, Global Markets, Asia-Pacific, HSBC, said the launch represents a ground-breaking conduit for mainland investors to access the international bond markets.

“It is a major milestone for the Bond Connect scheme, signaling further opening of China’s capital account,” he said. “The new link is set to accelerate the development of primary and secondary bond markets in Hong Kong. Offshore bonds could appeal to onshore mainland investors who wish to diversify their portfolios. As the market grows, more global bond issuers will be attracted to Hong Kong.” 

The Southbound initiative becomes China’s latest move to encourage outbound investment and will include the participation of 41 Mainland banks along with members of the Qualified Domestic Institutional Investor (QDII) and Renminbi QDII schemes.

There will be an initial daily quota of $3.11 billion, and an annual quota of $77 billion.

“The Southbound Bond Connect offer is something that has long been expected to help ensure balance between the Northbound and Southbound schemes,” said Gary O’Brien, head of bank and broker segment strategy at BNP Paribas Securities Services.

“We have seen for the other connect schemes that the role of the custodian is integral to the successful integration of the two markets because of their differing characteristics in terms of currency, settlement cycle and settlement model. We expect the same from the launch of Southbound bond connect.

“The onshore market in China has seen a widening interest from investors in differing asset classes in recent years; especially bonds and so it is an exciting time to see the same investors given enhanced access to the Hong Kong bond market.”